Question: Assume that a firm has the following Income Statement.
Use this data to determine the business risk and the financial risk as measured by the degree of operating leverage and the degree of financial leverage, respectively. Also, determine the combined leverage as found with the degree of combined leverage. Utilize these risk measures to see the affect of a change in sales.
Income Statement
December 31, Year 1
Sales ($34/unit)
$34,000,000
Variable Cost ($20/unit)
$20,000,000
Fixed Cost
$10,000,000
EBIT
$4,000,000
Interest Expense
$120,000
EBT
$3,880,000
Taxes (40%)
$1,552,000
Net Income
$2,328,000
Calculate the DOL.
Calculate the DFL.
Determine the DCL
If sales increased by 20% determine the change in EBIT and the change in EPS.