Exam 24: Financial Leverage and Operating Leverage

Bell Brothers has $3,000,000 in sales.Fixed costs are estimated to be $100,000 and variable costs are equal to 50% of sales.The company has $1,000,000 in debt outstanding at a before-tax cost of 13.5%.If Bell Brothers' sales were to increase by 20%,how much of a percentage increase would you expect in the company's net income?

Assume that a firm currently has EBIT of $2,000,000,a degree of total leverage of 6.000,and a degree of financial leverage of 1.875.If sales decline by 20% next year,then what will be the firm's expected EBIT in one year?

Stromburg Corporation makes surveillance equipment for intelligence organizations.Its 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 also permit sales to increase to $93,000,000.What is Stromburg's degree of operating leverage at the new projected sales level?