返回列表 发帖

Reading 28: Capital Structure and Leverage-LOS b 习题精选

Session 8: Corporate Finance
Reading 28: Capital Structure and Leverage

LOS b: Calculate and interpret the degree of operating leverage, the degree of financial leverage, and the degree of total leverage.

 

 

 

FCO, Inc. (FCO) is using EBIT forecasts to help plan its capital structure.

Expected EBIT

EBIT + 10%

EBIT

$80,000

$88,000

Interest expense

15,000

15,000

EBT

65,000

73,000

Taxes

26,000

29,200

Net income

39,000

43,800

Liabilities

200,000

Shareholder equity

250,000

Return on equity

15.60%

What is FCO’s degree of financial leverage?

A)
0.60.
B)
0.75.
C)
0.80.



 

Which of the following best describes a firm with low operating leverage? A large change in:

A)
the number of units a firm produces and sells result in a similar change in the firm’s earnings before interest and taxes.
B)
earnings before interest and taxes result in a small change in net income.
C)
sales result in a small change in net income.



Operating leverage is the result of a greater proportion of fixed costs compared to variable costs in a firm’s capital structure and is characterized by the sensitivity in operating income (earnings before interest and taxes) to change in sales. A firm that has equal changes in sales and operating income would have low operating leverage (the least it can be is one). Note that the relationship between operating income and net income is impacted by the degree of financial leverage, and the relationship between sales and net income is impacted by the degree of total leverage.

TOP

Which of the following events would decrease financial leverage?

A)
Paying dividends.
B)
Issuing debt to purchase assets.
C)
Issuing common stock to purchase assets.



Acquiring assets by issuing stock decreases the degree of financial leverage since total assets are increased but total liabilities remain the same.

TOP

A firm expects to produce 200,000 units of flour that can be sold for $3.00 per bag. The variable costs per unit are $2.00, the fixed costs are $75,000, and interest expense is $25,000. The degree of operating leverage (DOL) and the degree of total leverage (DTL) is closest to:

             DOL         DTL

A)
1.3   1.3
B)
1.6   1.3
C)
1.6   2.0



DOL = Q(P – V) / [Q(P – V) – F]
DOL = 200,000 (3 – 2) / [200,000(3 – 2) – 75,000] = 1.6

DTL = [Q(P - V) / Q(P - V) - F - I]
DTL = 200,000 (3 - 2) / [200,000 (3 - 2) - 75,000 - 25,000] = 2

TOP

All else equal, which of the following statements about operating leverage is FALSE?

A)
Lower operating leverage generally results in a higher expected rate of return.
B)

Operating leverage reflects the tradeoff between variable costs and fixed costs.

C)

Firms with high operating leverage experience greater variance in operating income.




Operating leverage is the trade off between fixed and variable costs. Higher operating leverage typically is indicative of a firm with higher levels of risk (greater income variance). Given the positive risk/return relationship, higher operating leverage firms are expected to have a higher rate of return. And, lower operating leverage firms are expected to have a lower rate of return.

TOP

Jayco, Inc. sells 10,000 units at a price of $5 per unit. Jayco's fixed costs are $8,000, interest expense is $2,000, variable costs are $3 per unit, and earnings before interest and taxes (EBIT) is $12,000. What is Jayco’s degree of financial leverage (DFL) and total leverage (DTL)?

DFL DTL

A)
1.33 1.75
B)
1.20 2.00
C)
1.33 2.00



DOL = [Q(P ? V)] / [Q(P ? V) ? F] = [10,000(5 ? 3)] / [10,000(5 ? 3) ? 8,000] = 1.67

 DFL = EBIT / (EBIT ? I) = 12,000 / (12,000 ? 2,000) = 1.2

DTL = DOL × DFL = 1.67 × 1.2 = 2.0

TOP

Which of the following statements regarding leverage is TRUE?

A)
A firm with high business risk is more likely to increase its use of financial leverage than a firm with low business risk.
B)
High levels of financial leverage increase business risk while high levels of operating leverage will decrease business risk.
C)
A firm with low operating leverage has a small proportion of its total costs in fixed costs.



A firm with high operating leverage has a high percentage of its total costs in fixed costs.

TOP

Financial leverage magnifies:

A)

taxes.

B)

earnings per share variability.

C)

operating income variability.




Financial leverage results in the existence of required interest payments and, hence, increased earnings per share variability. Higher debt ratios, given a fixed asset base, result in a greater earnings per share variability. Operating income is based on the products and assets of the firm and not on the firm’s financing and, hence, has no impact on financial leverage. Greater financial leverage is likely to reduce taxes due to the tax deductibility of interest payments.

TOP

Which of the following is a key determinant of operating leverage?

A)
The competitive nature of the business.
B)
Level and cost of debt.
C)
The tradeoff between fixed and variable costs.



Operating leverage can be defined as the trade off between variable and fixed costs.

TOP

Stromburg Corporation's sales are $75,000,000. Fixed costs, including research and development, are $40,000,000, while variable costs amount to 30% of sales. Stromburg plans an expansion which will generate additional fixed costs of $15,000,000, decrease variable costs to 25% of sales, and permit sales to increase to $100,000,000. What is Stromburg's degree of operating leverage at the new projected sales level?

A)

4.20.

B)

3.50.

C)

3.75.




Sales = $100,000,000

VC of 25% of sales = 25,000,000

FC of 40,000,000 + 15,000,000 = 55,000,000

DOL= [100,000,000 – 25,000,000] / [100,000,000 – 25,000,000 – 55,000,000] = 3.75

TOP

返回列表