Task: Leverages
Mr. Jim Smith is considering the possibility of opening his own machine shop .He expects first year sales to be AED. 600,000 , and he feels that his variable costs will be approximately 50% of sales . His fixed costs in the first year will be
AED. 250,000.
Jim will need to raise AED 800,000 to start the business and is considering two ways of financing :
1) 60% equity financing and 40% debt at an interest rate of 14% or
2) 100% equity
Required :
Q1) Calculate the degree of financial leverage under each financing plan. Include an explanation of what this figure means.
Q2) Calculate the degree of combined leverage under each financing plan.