Corporate Finance MCQ - Corporate Finance Section 2

46 Which of the following is not affected by changes in tax rate?

DFL is not affected by the tax rate whereas WACC and net profit margin are both impacted by changes in tax rate.

47 Which of the following is the most appropriate reason for analysts to understand a company’s use of operating and financial leverage?

Analysts need to understand a company’s use of operating and financial leverage to forecast future cash flows and select an appropriate discount rate.

48 Using the firm’s income statement presented below, its degree of financial leverage is closest to:

Income Statement	$ millions
Revenues	15.2
Variable Operating Costs	9.8
Fixed Operating Costs	3.5
Operating Income	1.9
Interest	1.0
Taxable Income	0.9
Tax	0.2
Net Income	0.7

DFL = (Operating income) / (Operating income – Interest expense) = [Q(P - V) - F] / [Q(P - V) - F - C] = $1.9 / $0.9 = 2.11.

49 Using the company’s income statement presented, its degree of operating

Income Statement	$ millions
Revenues	10.5
Variable Operating Costs	6.8
Fixed Operating Costs	2.5
Operating Income	1.2
Interest	0.4
Taxable Income	0.8
Tax	0.2
Net Income	0.6

DOL = (Revenues – Variable operating costs) / (Revenues – Variable operating costs –
Fixed operating costs)
= Q(P - V) / [Q(P - V) - F]
= (10.5 – 6.8) / (10.5 – 6.8 – 2.5) = 3.1.

50 A manufacturing company has the following income statement.

Income Statement	$ millions
Revenues	1100
Variable costs	450
Fixed costs	225
EBIT	425
Interest	70
Taxable Income	355
Tax	142
Net Income	213

The degree of total leverage for the company is closest to:.

DTL = [Q (P – V)] / [Q (P – V) – F – C] = (1100 – 450) / 355 = 1.83