Corporate Finance - Corporate Finance Section 2
51. Fred has the following information available.
| Operating income | $500,000 |
| Net income | $275,000 |
Given that the degree of total leverage is 3.63,the degree of operating leverage is closest to:
- Option : C
- Explanation : First, compute the degree of financial leverage: 500,000 / 275,000 = 1.818. Next, compute the degree of operating leverage: DTL = Degree of financial leverage * Degree of operational leverage. 3.63 = 1.818 * Degree of operational leverage. DOL = 2.
- Option : A
- Explanation : Alpha’s degree of operating leverage is the same as Beta’s, whereas Alpha’s degree of total leverage and degree of financial leverage are higher.
- Option : B
- Explanation : Financial leverage reduces net income by the interest cost, but increases return on equity because net income is generated with less equity.
- Option : A
- Explanation : Breakeven quantity = (Fixed operating costs + fixed financial costs) / (Price per unit – variable cost per unit) = (F + C) / (P - V) = (250,000 + 65,000) / (125 – 62.5) = 5,040.
- Option : A
- Explanation : Operating breakeven units = F / (P - V) = (Rs.1,960 million) / (Rs.3,972 - Rs.1,250) = 720,058.7803 units Operating breakeven sales = Rs.3,972 * 720,058.7803 units = Rs.2,860,073,475 or Operating breakeven sales = (Rs.1,960 million) / [1 - (Rs.1,250 /Rs.3,972)] = Rs.2,860,073,475 Total breakeven = (Rs.1,960 million + Rs.376 million) / (Rs.3,972 - Rs.1,250) = (Rs.2,336 million ) / 2,722 = 858,192.5055 Breakeven sales = Rs.3,972 * 858,192.5055 units = Rs.3,408,740,632 or Breakeven sales = (Rs.2,336 million) / [1- (Rs.1,250 / Rs.3,972)] = Rs.3,408,740,632.
