Firm A Firm B Firm C

Sales 10,000 11,000 19,500

less:operating cost
Fixed cost (FC) 7,000 2,000 14,000
Variable Cost (VC) 2,000 7,000 3,000
Operating pofit or EBIT 1,000 2,000 2,500

Firm A Firm B Firm C

EBIT 2,700 2,700 2,700
less:Interest 0 600 0
Earnings before Taxes (EBT)/Profit before taxes (PBT) 2,700 2,100 2,700
Income Taxes(EBT*t) 1080 840 1080
Earnings after taxes 1,620 1,260 1,620
Preferred Dividend 0 0 550
Earnings available to shareholders 1,620 1,260 1,070
No of shares common stock outstanding (NS) 300 200 200

EPS 5.4 6.3 5.35

Tot. Risk=Business Risk+Financial Risk

Risk Component
Standard Dev. Of EPS
Coefficent of Variation of EPS=CVEPS=SDEPS/E[EPS] Measure of relative total firm risk
Standard Dev. Of E[EBIT]
Coefficent of Variation of CVEBIT=SD EBIT/E[EBIT] Measure of relative business risk

CVEPS- CV EBIT = Measure of relative financial risk

The coefficient of variation shows the extent of variability

of data in a sample in relation to the mean of the
population. In finance, the coefficient of variation allows
investors to determine how much volatility, or risk, is
assumed in comparison to the amount of return expected
from investments
Quantity Breakeven=QBE Fixed Cost/Price-Variable Cost

Sales Breakeven=SBE Fixed Cost+(QBE)+(VC)

Fixed Cost/[1-(VC/S)]

DoL for Single Product Firm Q(P-V)/Q(P-V)-FC

DoL for multiproduct firm EBIT+FC/EBIT

DFLEBIT*Xdollar DFL=EBIT/EBIT-I-[PD/(1-t)]

EPS=Net Profit after taxes/No of shares or (EBIT-I)(1-t)-PD/NS

DTL or Degree of Total Leverage DTL qunits = Q(P-V)/Q(P-V)-FC-I-[(PD/(1-t))]

DTL S dollar=EbIT/EBIT-I-[PD(1-t))]
DTLQunits=DoL Qunits or S dollar*DFL EBIT*dollar
 DOL
Firm A
Contribution/EBIT

10,000-2000/1000
8

*Contribution=Sales-VC

DFL
Firm A
EBIT/PBT
2700/2700
1

Selling price of cycle =50perunit

VC=25 per unit
Annual fixed operating cost=100,000
200,000 debt at 8% interest, calculate DTL at
8,000 unit of level output

8000(50-25)/8000(50-25)-100,000-16000
=2.38
 DOL
Firm B Firm C
Contribution/EBIT Contribution/EBIT

11,000-7,000/2,000 19,500-3,000/2500
2 6.6

on=Sales-VC

DFL
Firm B Firm C
EBIT/PBT EBIT/PBT
2700/2100 2700/[2700-(550/.6)]
1.28 1.51