Operating and Financial Leverage

Solutions to Wyoming Gas and Electric

1.
BEP =

()

30,000
30,000
=
=
= 36,674.8
115,000 25,000
1.045 0.227
110,000 110,000

2. D. O. L. = () = where S = Sales, VC = Total Var. Cost

DOL =

115,000 25,000
= 1.5
115,000 25,000 30,000

3. D. O. L. = %
% = % = 1.5 20% = 30%
4.

36,000
20,000

(1)

60,000(140%)
200,000

EPS = #
ROA =

ROE = ROA + ( )

= $1.80
= 18%

. 18 + 0 = 18%

27,000
5,000

= $5.40
60,000(140%)
200,000

= 18%x

. 18 + 3 (.18 .06) = 54%

5. At 132,000
A

Sales (132,000 x 1.045)

137,940

137,940

V.C. (132,000 X 0.227)

29,964

29,964

FC

30,000

30,000

Net Operating Income

77,976

77,976

Interest

15,000

Profit before taxes

$ 77,976

$ 62,976

Taxes (40%)

31,190

25,190

$ 46,786

$ 37,786

EPS

46,786
20,000

ROA

77,976(140%)
200,000

ROE

0.234 + 0 = 23.4%

0.234 + (150/50) x (0.234 0.06) = 75.6%

%EPS

2.341.80
1.80

7.56 5.40
5.40

%ROA

23.4% 18%
18%

= 30%

23.4%18%
18%

%ROE

23.4% 18%
18%

= 30%

75.6% 54%
54%

= $2.34
= 23.4%

= 30%

37,786
5,000

= $7.56

77,976(140%)
200,000

= 23.4%

= 40%
= 30%
= 40%

6. Since sales have increased by 20%, we should be able to get the same answers as in Question 5 by using
our "shortcuts" (leverage formulae).
First, we can easily compute the combined leverage DCL = 1.5 for A and DCL = 2 for B.

A. 20% x 1.5 = 30% change in ROE, EPS

B. 20% x 2.0 = 40% change in ROE, EPS
Confirms findings in Question 5.

7.
()

DFLB = () =
=

115,000 25,00030,000
115,000 25,00030,00015,000

= 1.3333
DCLB = DFLB DOLB
2.00 = 1.33 1.5 which checks out.

8.
A

Sales (88,000 x 1.045)

91,960

91,960

V.C. (88,000 X 0.227)

19,976

19,976

FC

30,000

30,000

Net Operating Income

41,984

41,984

15,000

Profit before taxes

41,984

26,984

Taxes (40%)

16,794

10,794

25,190

16,190

Interest

EPS

25,190
20,000

= $1.26

16,190
5,000

= $3.24

9. a.+b. Debt Service Coverage Ratio x Interest Expense= Minimum EBIT Allowed
2.0 15,000 = 30,000
Q (P V) F = Minimum EBIT Allowed
=
=

Minimum EBIT Allowed + F

PV

30,000 + 30,000
= 73,350 units
1.045 0.227

This is equivalent to a decline of 36,650 units or a decline in sales revenue of $38,299.