A New Restaurant Is Ready to Open for Business C) $$D F L = \frac { E B I T } { E B I T - I } = \frac { \$ 300,000 } { \$ 300,000 - \$ 120,000 } = 1.67 \times$$

Essay

A new restaurant is ready to open for business.It is estimated that the food cost (variable cost)will be 40% of sales,while fixed cost will be $450,000.The first year's sales estimates are $1,250,000.The cost to start up this restaurant will be $2,000,000.Two financing alternatives are being considered: (a)50% equity financing and 50% debt at 12%,or (b)all equity financing.Common stock can be sold at $5 per share.
A)Compute break-even point.
B)Compute DOL.
C)Compute DFL and DCL for both financing plans.
D)Include an explanation of what your computations mean.
A) B) $$\begin{array} { l } D O L = \frac { S - T V C } { S - T V C - F C } = \frac { \$ 1,250,000 - 0.40 ( \$ 1,250,000 ) } { \$ 1,250,000 - 0.40 ( \$ 1,250,000 ) - \$ 450,000 } \\D O L = \frac { \$ 750,000 } { \$ 300,000 } = 2.50 \times\end{array}$$ C) $$D F L = \frac { E B I T } { E B I T - I } = \frac { \$ 300,000 } { \$ 300,000 - \$ 120,000 } = 1.67 \times$$ $$D C L = \frac { S - T V C } { E B I T - I } = \frac { \$ 750,000 } { \$ 180,000 } = 4.17 \times = 2.50 \times 1.67$$ $$D F L = \frac { E B I T } { E B I T - I } = \frac { \$ 300,000 } { \$ 300,000 - \$ 0 } = 1.00 \times$$ $$D C L = \frac { S - T V C } { E B I T - I } = \frac { \$ 750,000 } { \$ 300,000 } = 2.50 \times = 2.50 \times 1.00$$ D)Subjective.