Question 1:
The following are abbreviated contribution income statements of two companies, both of which are active in the food and beverage industry.
Required:
(a) Calculate the degree of operating leverage.
(b) Calculate the degree of financial leverage.
(c) Calculate the degree of combined leverage.
(d)Find the break-even point in dollars.
(e)Discuss the relative riskiness of the two companies based on the leverage factors calculated.
QUESTION 2:
Polar Ltd predicts that profits in the coming year will be N$32 Million. There are 8 Million shares in issue and the company maintains a debt/equity ratio of 2.
Required:
(a) Calculate the maximum funds that will be available for investments without issuing new equity and the increase in borrowing that goes along with it.
(b) Suppose the firm uses a residual dividend policy, and planned capital expenditures total N$40 Million, what will the dividend per share amount be?
(c) In part (b) how much borrowing will take place?
(d) If the company plans no capital outlays for the coming year, what is the dividend payout ratio and the associated new borrowing?