Given the following financial data for Boston Technology, Assume a marginal tax
ID: 2802514 • Letter: G
Question
Given the following financial data for Boston Technology, Assume a marginal tax rate of 40%.
a. Compute and discuss the degree of operating and financial leverage.
b. Compute and discuss the firm’s degree of combined leverage.
c. What happens to EPS if sales increase by 15%? 8% decrease? Compare and discuss the two.
Sales
2010
2011
Sales
$700,000
$760,000
Fixed costs
175,000
190,000
Variable costs
406,000
448,000
EBIT
119,000
122,000
Interest
42,000
46,000
Shares outstanding
100,000
102,000
2010 2011
Sales
700,000 760,000 Fixed Costs 175,000 190,000 Variable Costs 406,000 448,000 EBIT 119,000 122,000 Interest 42,000 46,000 Shares Outstanding 100,000 102,000Explanation / Answer
Solution :- Income statement
Sales
(-) Variable cost
700000
406000
760000
448000
Contribution margin
(-) Fixed cost
294000
175000
312000
190000
EBIT
(-) Interest
119000
42000
122000
46000
EBT (Earnings before tax)
(-) Tax expense (40 %)
77000
30800
76000
30400
Degree of operating leverage = Contribution / EBIT
Degree of financial leverage = EBIT / EBT
Degree of combined leverage = Contribution / EBT
Conclusion :-
Note :- A leverage computed with the combined effects of fixed operating costs and fixed financial costs is known as combined leverage and it can be computed as under :-
Degree of combined leverage = Contribution / EBT
Or
Degree of combined leverage = Degree of operating leverage * Degree of financial leverage.
Particulars Year 2010 Year 2011Sales
(-) Variable cost
700000
406000
760000
448000
Contribution margin
(-) Fixed cost
294000
175000
312000
190000
EBIT
(-) Interest
119000
42000
122000
46000
EBT (Earnings before tax)
(-) Tax expense (40 %)
77000
30800
76000
30400
Net income 46200 45600Related Questions
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