Computing and interpreting the degree of operating leverage (DOL)It is December 31. Last year, Carter Chemical Co. had sales of $12,000,000, and it forecasts that next year’s sales will be $11,160,000. Its fixed costs have been and are expected to continue to be $6,600,000, and its variable cost ratio is 7.50%. Carter’s capital structure consists of a $13.5 million bank loan, on which it pays an interest rate of 9%, and 250,000 shares of common equity. The company’s profits are taxed at a marginal rate of 40%.Given this data, complete the following sentences:•The percentage change in the company’s sales is_____%•The percentage change in Carter’s EBIT is_____%•The degree of operating leverage (DOL) at $11,160,000 is____.___ There are several ways to use and interpret a firm’s DOL value. Consider the following statement and indicate whether it accurately reflects the meaning or an appropriate use of a firm’s DOL value.Assume that at a given sales level, a firm’s DOL is 2.5. This means that a 1% change in the firm’s sales will result in a corresponding 2.5% change in the firm’s EBIT. True or False: This statement accurately describes a firm’s DOL. False True

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Answered: t is December 31. Last year, Carter…

EBK CFIN

6th Edition

ISBN:9781337671743

Author:BESLEY

Publisher:BESLEY

Chapter16: Financial Planning And Control

Section: Chapter Questions

Problem 19PROB

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Computing and interpreting the degree of operating leverage (DOL)

It is December 31. Last year, Carter Chemical Co. had sales of $12,000,000, and it forecasts that next year’s sales will be $11,160,000. Its fixed costs have been and are expected to continue to be $6,600,000, and its variable cost ratio is 7.50%. Carter’s capital structure consists of a $13.5 million bank loan, on which it pays an interest rate of 9%, and 250,000 shares of common equity. The company’s profits are taxed at a marginal rate of 40%.

Given this data, complete the following sentences:

•	The percentage change in the company’s sales is_____%
•	The percentage change in Carter’s EBIT is_____%
•	The degree of operating leverage (DOL) at $11,160,000 is____.___

There are several ways to use and interpret a firm’s DOL value. Consider the following statement and indicate whether it accurately reflects the meaning or an appropriate use of a firm’s DOL value.

Assume that at a given sales level, a firm’s DOL is 2.5. This means that a 1% change in the firm’s sales will result in a corresponding 2.5% change in the firm’s EBIT.

True or False: This statement accurately describes a firm’s DOL.

False

True

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