Capital structure and leverage. Read Web Appendix 13A before answering this section. Assume that the Samsung Corporation has $2 million in sales (S), with variable costs (VC) being equal to 70% of its sales, its fixed costs (F) are $100,000, and its annual long-term interest expense (I) is $50,000. Show all calculations.
Question 1: Determine Samsung's degree of operating leverage (DOL). Check figure: DOL = 1.2. Hint: Use equation 13A-2a.
Question 2: Determine Samsung's degree of financial leverage (DFL). Hint: Use equation 13A-3.
Question 3: If Samsung's operating income (EBIT) increases by 20%, how much will its net income increase? Check figure: NI will increase by 22.22%. Hint: You can use the DFL to help answer this.
Question 4: Determine Samsung's degree of total leverage (DTL). Check figure: DTL = 1.3333.
Question 5: If Samsung's sales increase by 15%, by what percentage will the company's net income increase? Answer this question independently of question 3. Hint: You can use the DTL to help answer this.
Question 6: Determine Samsung's DFL if it had no long-term debt.