PB -9 .

Degree of operating leverage

a.
FC
Operating Breakeven Point =

p -
vc

$3825
$24.50
=
-
$950

3825
=
15

= 255 flower arrangements

@ 260 units
=

b. EBIT =
( 260 ✗ $24.50 ) -

[ $3825 + ( 260 ✗ $9.50) )

=
$6370 -
$6295

=
$75
=

@ zoo units

EBIT =
( 300 ✗ $2450 ) -

[ $3825T (300×115950) )
=
$7350 -

$6675

$671
=

@ 340 units

EBIT =
(340×11524150) -

( $3825 -1 (340×1159.50)]
=
$8330 -

$7055
=
$1215
c. @ 260 units
percentage change in Sales =
(260-300)/300
=
( -40 ) / 300
= -0.1333 or -13 -33%
=

Percentage change in EBIT =

( $75 -

$675 ) / $675
=
( $600 ) / $675
-

=
-0.8889 or -88.89%
@ 340 units =

Percentage change in sales =

(340-300)/300
=
40/300
=
O '

1333 or 13-33 %
=

Percentage change in EBIT

=

( $1775 -

$675 ) / $675
=
$600 / $675
=
0-8889 or 88.89%

d- DOL @ 300 units

[ 300 ✗ ( $24.50 -
$9.50 ) )
Dol =

[ 300 ✗ ( $24.50 -
$9.50 ) ) -
$3825
= $4500
[ $4500 ) $3825
-

= $4500_
$675
= 6-670/0
=

A 9% change in sales will lead to a 6.67%

change in EBIT .
PI} -16 .

Integrative : Leverage and Risk

a. Firm R

( 100,000 ✗ ($2 $1.70 )] $ 30000

DOL
-

=
=

( $30000 ) $6000
( 100,000 ($2 $1.70 )] $6000
-

✗ -

= $30000
$ 24000
=
1.25

"" " =
( 100,000 ✗ ($2 -

$1.70 )]
-

$6000
= $14000
{o×($2-$i$É $24000 -
$10000

$24000
$14000
=

=
1.71

DTL =
125 ✗ I' 71

2.
If
=
b- Firm W

( 100,000 ✗ ($2.50 $1 )] $150000

DOL
-

=
=

( 100,000 ✗ ($2.50 -

$1 )] -

$62500 ( $150000 -

$62500 )

= $150000
$87500
=
1.71

Dfl = ll00,000×($Z50-$1)]-fÉ = $87500

{ 1100,000 ✗ ($2.50 $1 )]
-
-

$67500 }
-

$17500 $87500 -

$17500
$87500
$70000
=

=
1.25

DTL = 171 × 1.25

= 2 . 14
I

c.

Comparing the two firms

,
it can be seen that
Firm R has lesser operating risk , from the

computed Degree of operating leverage which is at

1. 25 ,
than Firm W 's DOL of 1.71 . However ,

Firm higher financial risk

R has as a
,

reflected from its Degree Of Financial leverage

at 1-71 than Firm W 's ,
DFI of 1.25 '
d.
As the two firms arrived at the same total leverage
of 2.14 ,
it was evident that they differ on

their operating and financial structures

-

Thus ,

one conclusion that can be derived is that two firms

may be structured differently but just like how total

leverage is described from the book ,

both firms experienced the
total impact of its fixed costs of their own operating and

financial structure
-
to simplify .
both these firms may be

equally leveraged
.
 PIZ -23 .
EBIT -
EPs and Preferred stock

a. using $30000 and $50000

STRUCTURE A STRUCTURE B

EBIT
A 75000×016=12000
$30000 $50000 $30000 $50000
( )
:

Less : Interest B- 50000×0.15=7500

-

120€ -7500 75OO_

Net profit before taxes $18000 $38000 $22500 $42500
less taxes I ::÷÷÷÷÷÷÷÷1
;÷$%%÷
:
-7200 Io
22500 X -
40 = 9000

Net profit after taxes $10800 $22800 $

"

Less : Preferred Dividends 1-800 1-800 270-0 2701

Earnings available for
common shareholders $ 9000 $21000 $10800 $22800

Eps ( 8000 shares ) $1115 $2615

EPs ( 10000 Shares ) $1.08 $2.28

*
preferred dividends
A = 10000 ✗ 018 D= 15000 ✗ 0-18
=
1800 = 2700

b. comparison of
*^
"
" "" " "
capital
"
structures •
u z , -
structure B
oooo

É z -

1- 5 -

crossover point
$21000
structure A 's EDIT at $0 Eps 1- O -

f ••••

is $15000 , as for 0.5 -

structure B it is at $12000
o%⑧z\ÉO5
°

EBIT ( $)
?⃝
c. above A has
As reflected to the graph shown ,
structure a

steeper capital structure slope . hence ,

it bears a higher
or
greater financial leverage that can be further
associated with bearing a
greater financial risk .

d. In consideration with the value of the crossover point

of $27000 , If EBIT is below this amount ( $27000 ) ,
then structure B is preferred On . the other note ,

if EBIT is above $27000 then ,

structure A is
more preferable .

e-
If the firm expects its EBIT to be $35000 then structure
,

A should be recommended since it

yields greater changes
in EPs as compared to the other option .