Problem: The Denny Company is planning to expand production because of the increased volume of sales. The current income statement (before expansion) is as follows:
Denny Company Income Statement2006
Sales $4,000,000
Less: Variable costs (40%) $1,200,000
Fixed costs 800,000
Earnings before interest and taxes 2,000,000
Less: Interest expense 400,000
Earnings before taxes 1,600,000
Less: Taxes (@ 35%) 560,000
Earnings after taxes 1,040,000
Shares 100,000
Earnings per share $3.90
Based on the data provided:
a. Calculate the degree of operating leverage:
b.Calculate the degree of financial leverage:
c. Calculate the degree of combined leverage before expansion: