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7. The computation and interpretation of the degree of combined leverage (DCL) You and your colleague, Ian, are currently participating in a finance internship program
7. The computation and interpretation of the degree of combined leverage (DCL) You and your colleague, Ian, are currently participating in a finance internship program at Campbell Construction. Your current assignment is to work together to review Campbell's current and projected income statements. You will also assess the consequences of management's capital structure and investment decisions on the firm's future riskiness. After much discussion, you and Ian decide to calculate Campbell's degree of operating leverage (DOL), degree of financial leverage (DFL), and degree of total leverage (DTL) based on this year's data to gain insights into Campbell's risk levels. The most recent income statement for Campbell Construction follows. Campbell is funded solely with debt capital and common equity, and it has 3,000,000 shares of common stock currently outstanding. This Year's Data Next Year's Projected Data $43,200,000 Sales $40,000,000 Less: Variable costs 20,000,000 21,600,000 21,600,000 Gross profit 20,000,000 8,000,000 8,000,000 Less: Fixed operating costs Net operating income (EBIT) 12,000,000 13,600,000 Less: Interest expense 800,000 800,000 11,200,000 Taxable income (EBT) Less: Tax expense (40%) 4,480,000 12,800,000 5,120,000 7,680,000 Net income $6,720,000 Earnings per share (EPS) $2.24 $2.56 Given this information, complete the following table and then answer the questions that follow. When performing your computations, round your EPS value and the percentage change values to two decimal places. Given this information, complete the following table and then answer the questions that follow. When performing your computations, round your EPS value and the percentage change values to two decimal places. ||| Campbell Construction Data DOL (Sales = $40,000,000) DFL (EBIT = $12,000,000) DTL (Sales = $40,000,000) Everything else remaining constant, assume Campbell Construction decides to convert its labor-intensive manufacturing facility into a capital-intensive facility by laying off over 75% of its labor force and replacing the workers with robotic and technologically advanced manufacturing equipment. Assume that, over the next five years, the wages saved as a result of the layoffs will pay for the changes made to Campbell's plant and equipment changes. How would this affect Campbell's DOL, DFL, and DCL? The DOL would be expected to The DFL would be expected to The DTL would be expected to
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