A new lumber yard is ready to open for business. It is estimated that the lumber

Question

A new lumber yard is ready to open for business. It is estimated that the lumber (variable cost) will be 30% of sales, while fixed cost will be $560,000. The first year's sales estimates are $1,550,000. The cost to start up this lumber yard will be $2,300,000. Two financing alternatives are being considered: a) 50% equity financing and 50% debt at 8%, or b) all equity financing. Common stock can be sold at $5 per share.
a) Compute the Operating Break-even point in dollars.
b) Compute DOL.
c) Compute DFL and DCL for both financing plans.

Explanation / Answer

a) for operating break even point = 2,300,000/0.7 = 3285714 dollars

b) DOL = 0.7

c) DFl = 1 for a

and 0

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