Case Study - Dominos Pizza Enterprise Limited

Operation and Financial Leverages

1. What is the leverage? And why companies use leverages?
2. What is meant by Operating leverage, and what are the implications of increasing the operating leverage of Dominos business?
3. What is meant by Financial leverage, and what are the implications of increasing the financial leverage of Dominos business?
4. Following case study is created for this assessment therefore names and values are fictitious.

Sue Wilson is the new financial manager of Dominos Pizza, an Australian based producer of specialized Pizza sold to athletics to eat 6 hours before the game for an excellent performance. She is responsible for constructing financial forecasts and for evaluating the financial feasibility of new products. Dominos received an order to supply specialized Pizza for the entire footy season in 2021. The project forecast financial information is as follows:

Selling price per Pizza (P) $ 10.00

The variable cost of goods sold (% of P) 75%

Fixed operating costs $ 500,000

Interest expense $30,000

Preference dividends $ 6.00

Marginal tax rate 30%

Number of ordinary shares issued to finance this project 100,000

Number of preference shares issued to finance this project 5,000

1. What level of sales does Dominos need to achieve to break even with respect to operating income?
2. At its operating breakeven point, what will be the EPS for Domino?
3. How many pizzas (units) does Dominos need to sell to attain the financial breakeven point? (Hint: An easy way to look at this problem is to consider how many units, beyond those needed to operate at the breakeven point, Dominos needs to sell to cover its fixed financial charges.)
4. Dominos expects only this pizza sales to be $10,000,000 what is its degree of operating leverage (DOL), its degree of financial leverage (DFL), and its degree of total (combined) leverage (DTL)? Based on the DTL, compute the earnings per share you would expect if sales turn out to be $7,000,000 in the year 2021.
5. When you analyze Dominos annual report, what is your view on the overall financial health of Dominos, has it been impacted by the COVID-19 crisis? Please read the 2020 annual report and summarise your answer with clear evidence.