Please help! Number 8 Number 9 Number 10 Score: 0 of 10 pts 8 of 10 (1 complete)
ID: 2791384 • Letter: P
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Score: 0 of 10 pts 8 of 10 (1 complete) | HW Score: 10%, 10 of 100 pts P13-16 (similar to Question Help Integrative Leverage and risk Firm R has sales of 97,000 units at $1.95 per unit, variable operating costs of $1.65 per unit, and fixed operating costs of $6,000. Interest is $10,130 per year. Firm W has sales of 97,000 units at $2.54 per unit, variable operating costs of $1.04 per unit, and fixed operating costs of S 62,500. Interest is $17,600 per year. Assume that both firms are in the 40% tax bracket. a. Compute the degree of operating, financial, and total leverage for firm R. b. Compute the degree of operating, financial, and total leverage for firm W. c. Compare the relative risks of the two firms. d. Discuss the principles of leverage that your answers illustrate. a. The degree of operating leverage for firm R is. (Round to two decimal places.)Explanation / Answer
8)
a) For Firm R
DOL = degree of operating leverage
DOL = (price - variable operating cost per unit) * number of units sold / [(price - variable operating cost per unit) * number of units sold] - fixed operating cost = (1.95 - 1.65) * 97,000 / [(1.95 - 1.65) * 97,000] - 6000
= 29100 / 23100 = 1.25
DFL = degree of financial leverage
DFL = (sales amount - total variable costs - fixed cost) / (sales amount - total variable costs - fixed cost - any interest/debt payment)
sales amount = 189150 (cost per unit * no of units)
total variable costs = 160050
fixed cost = 6000
interest = 10130
= 1.78
DTL = degree of total leverage
= DOL * DFL
= 1.25 * 1.78 = 2.2
b) Firm W
DOL = (price - variable operating cost per unit) * number of units sold / [(price - variable operating cost per unit) * number of units sold] - fixed operating cost = (2.54 - 1.04) * 97,000 / [(2.54 - 1.04) * 97,000] - 62500
= 1.753
DFL = (sales amount - total variable costs - fixed cost) / (sales amount - total variable costs - fixed cost - any interest/debt payment) = (246380 - 100880 - 62500) / (246380 - 100880 - 62500 - 17600)
= 1.269
DTL = 2.2
c)
Firm R has less operating risk but more financial risk when compared with firm W
d)
Two firms R and W has different operating and financial structure may be equally leveraged(DTL is same) . These firms structure may differ and still have the same amount of total leverage