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Business Administration - Accounting & Financial Planning FIN401 Chapter Notes - Chapter 5: Operating Leverage, Capital Structure, Liquid Oxygen

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greenmuskrat329
20 Jan 2018
School
Seneca College
Department
Business Administration - Accounting & Financial Planning
Course
Business Administration - Accounting & Financial Planning FIN401
Professor
Larry Hurst

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Document Summary

Cal(cid:272)ulate (cid:271)reak-e(cid:448)e(cid:374) i(cid:374) u(cid:374)its a(cid:374)d i(cid:374) dollars. (cid:894)lo(cid:1005)(cid:895) Defi(cid:374)e le(cid:448)erage as a (cid:373)ethod to (cid:373)ag(cid:374)if(cid:455) ear(cid:374)i(cid:374)gs a(cid:448)aila(cid:271)le to the fir(cid:373)"s (cid:272)o(cid:373)(cid:373)o(cid:374) shareholders. (cid:894)lo(cid:1006)(cid:895: what is le(cid:448)erage, break-e(cid:448)e(cid:374) a(cid:374)al(cid:455)sis, operati(cid:374)g le(cid:448)erage, risk a(cid:374)al(cid:455)sis of le(cid:448)erage, fi(cid:374)a(cid:374)(cid:272)ial le(cid:448)erage, i(cid:374)differe(cid:374)(cid:272)e poi(cid:374)t, co(cid:373)(cid:271)i(cid:374)ed or total le(cid:448)erage, su(cid:373)(cid:373)ar(cid:455) a(cid:374)d co(cid:374)(cid:272)lusio(cid:374)s. Defi(cid:374)e a(cid:374)d (cid:272)al(cid:272)ulate operati(cid:374)g le(cid:448)erage a(cid:374)d assess its opportu(cid:374)ities a(cid:374)d li(cid:373)itatio(cid:374)s. (cid:894)lo(cid:1007)(cid:895) Defi(cid:374)e a(cid:374)d (cid:272)al(cid:272)ulate fi(cid:374)a(cid:374)(cid:272)ial le(cid:448)erage a(cid:374)d assess its opportu(cid:374)ities a(cid:374)d li(cid:373)itatio(cid:374)s. (cid:894)lo(cid:1008)(cid:895) Cal(cid:272)ulate the i(cid:374)differe(cid:374)(cid:272)e poi(cid:374)t (cid:271)et(cid:449)ee(cid:374) fi(cid:374)a(cid:374)(cid:272)i(cid:374)g pla(cid:374)s usi(cid:374)g. Le(cid:448)e(cid:396)age is usi(cid:374)g fi(cid:454)ed (cid:272)osts to (cid:373)ag(cid:374)if(cid:455) the pote(cid:374)tial (cid:396)etu(cid:396)(cid:374) to a fi(cid:396)(cid:373) (cid:1006) t(cid:455)pes of fi(cid:454)ed (cid:272)osts: fi(cid:454)ed ope(cid:396)ati(cid:374)g (cid:272)osts = (cid:396)e(cid:374)t, a(cid:373)o(cid:396)tizatio(cid:374) fi(cid:454)ed fi(cid:374)a(cid:374)(cid:272)ial (cid:272)osts = i(cid:374)te(cid:396)est (cid:272)osts f(cid:396)o(cid:373) de(cid:271)t. Ope(cid:396)ati(cid:374)g le(cid:448)e(cid:396)age = the deg(cid:396)ee to (cid:449)hi(cid:272)h (cid:272)apital assets a(cid:374)d asso(cid:272)iated fi(cid:454)ed (cid:272)osts a(cid:396)e utilized. Fi(cid:374)a(cid:374)(cid:272)ial le(cid:448)e(cid:396)age = the a(cid:373)ou(cid:374)t of de(cid:271)t used i(cid:374) the (cid:272)apital st(cid:396)u(cid:272)tu(cid:396)e (cid:894)de(cid:271)t/e(cid:395)uit(cid:455) (cid:373)i(cid:454)(cid:895) Operati(cid:374)g le(cid:448)erage fi(cid:454)ed. profits (cid:449)he(cid:374) sales (cid:272)ha(cid:374)ges (cid:271)(cid:455) 1 per(cid:272)e(cid:374)t: operati(cid:374)g le(cid:448)erage: the degree to (cid:449)hi(cid:272)h a fir(cid:373)"s operati(cid:374)g (cid:272)osts are.

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Related Questions

Problem 5-13 Break-even point and degree of leverage [LO5-2, 5-5]

United Snack Company sells 50-pound bags of peanuts to university dormitories for $44 a bag. The fixed costs of this operation are $381,250, while the variable costs of peanuts are $.27 per pound.

a. What is the break-even point in bags?

b. Calculate the profit or loss (EBIT) on 11,000 bags and on 24,000 bags.
c. What is the degree of operating leverage at 19,000 bags and at 24,000 bags? (Round your answers to 2 decimal places.)

d. If United Snack Company has an annual interest expense of $27,000, calculate the degree of financial leverage at both 19,000 and 24,000 bags. (Round your answers to 2 decimal places.

e. What is the degree of combined leverage at both a sales level of 19,000 bags and 24,000 bags? (Round your answers to 2 decimal places.)


1. A highly automated plant would generally have

all fixed costs

more fixed than variable costs

all variable costs

more variable than fixed costs


2. If the price per unit decreases because of competition but the cost structure remains the same

the breakeven point rises

the degree of combined leverage declines

the degree of financial leverage declines

all of these.


3 If a firm has fixed costs of $31,000, a price of $9.50, and a breakeven point of 15,500 units, the variable cost per unit is:

$8.50

$7.50

$6.00

$9.50

4. Davison Toaster Corp. sells its products for $250 per unit. It has the following costs:

Rent $109,900
Factory labor $29 per unit
Executive salaries $290,000
Raw materials

$6 per unit


The break-even point is

1,210 units

not enough information has been provided to determine the break-even point.

less than 1,710 units

more than 1,210 units

5. A low DOL means:

there is low debt.

there are high overhead costs.

there is a large amount of equity.

there are low fixed costs.

6. Breakeven analysis

is useful to know how much changes in volume affect cost and profit.

short-term profitability.

does not include depreciation expense as a fixed cost when calculating the degree of financial leverage.

all of these.




7. Combined leverage is concerned with the relationship between

changes in EBIT and changes in net income.

changes in volume and changes in EBIT.

changes in volume and changes in EPS.

changes in EBIT and changes in EPS.

Revenue minus variable and fixed costs best describes: EBIT.EBITDA. NOPAT. EAT.

QUESTION 2 Compared to an identical project with a lowerproportion of fixed costs, a project with a higher proportion offixed costs will have: a higher degree of sensitivity of EBITDA toa change in revenues. a lower degree of sensitivity of EBITDA to achange in revenues. no discernible difference of a change insensitivity of EBITDA to a change in revenues. a stable net incomestream as a function of revenues.

QUESTION 3 Depreciation and amortization are treated like fixedcosts: in the calculation of the degree of pretax cash flowoperating leverage. in the calculation of the degree of accountingoperating leverage. for cash flow purposes. for computing dividend.2

QUESTION 4 If the degree of accounting operating leverage is 1.3for a firm, then a 10 percent increase in revenue should drive a:12% increase in pretax operating cash flows. 13% increase in EBIT.30% increase in EBIT. 1.3% increase in pretax operating cashflows.

QUESTION 5 Which is the term used to define how many units mustbe sold for pre-tax operating cash flow to be equal to zero?Pre-tax accounting operating profit break-even point Pre-taxoperating financial leverage break-even point Pre-tax accountingsensitivity break-even point Pre-tax operating cash flow break-evenpoint 2 points QUESTION 6 The difference between revenue andvariable cost is called: total contribution. net profit. EBIT.EAT.

QUESTION 7 Which of the following statements is true of theeconomic break-even point? It is the number of units that must besold for accounting operating profit to equal $0. It is the levelof unit sales at which cash flows or profitability for one projectalternative switches from being lower than that of anotheralternative to being higher. It is the number of units that must besold each year during the life of a project so that the NPV of aproject equals $0. It is the number of units that must be sold forpretax operating cash flow to be $0.

QUESTION 8 Astroscope Tours finds that if it were to increaseits price by 10 percent, it would have a 6 percent reduction in theNPV of its new 3-Hour Tour. Considering other things to beunchanged, Astroscope's analysis could be described as: Monte Carlosimulation. break-even analysis. sensitivity analysis. varianceanalysis.

QUESTION 9 If a firm were interested in knowing the effect of asingle input change on the net present value of a project, then thefirm would most likely want to perform: a Monte Carlo simulation. ascenario analysis. a sensitivity analysis. a break-evenanalysis.

QUESTION 10 Scenario analysis can help a firm to: understand thedegree of uncertainty that a different set of project-affectingcircumstances may hold. eliminate all of the uncertainty that adifferent set of project-affecting circumstances may hold.transform a risky project into a risk-free project. understand thedegree of certainty that a similar set of project-affectingcircumstances may hold.