Leverage and Risk Firm R has sales of 100,000 units at $2.00 per unit, variable operating cost of $1.70 per unit, and fixed operating cost of $6,000. Interest of $10,000 per year Firm W has sales of 100,00 units at$2.50 per unit, variable operating cost of $1.00 per unit, and fixed operating cost of $62,500. Interest is $17,500 per year. Assume that both firms are in the 40% tax bracket.
a) Compute the degree of operating, financial, and the total leverage for firm R.
b) Compute the degree of operating, financial, and total leverage for firm W.
c) Compute the relative risk of the two firms.
d) Discuss the principles of leverage that your answers illustrate.