Click to see additional instructions CH13 Leverage refers to the use of fixed costs to increase the return to shareholders. Operating leverage is the use of fixed operating costs such as fixed cost of goods sold and depreciation to magnify the earnings before interest and taxes. The degree of operating leverage (DOL) = % change in EBIT/% change in Sales. Financial leverage refers to the use of fixed financing costs such as long-term debts to magnify the return to shareholders. The degree of financial leverage (DFL) = % change in EPS /% change in EBIT. And the degree of total leverage = % change in EPS /% change in sales or DTL = DOLXDFL. Use the following information to calculate the degrees of leverages. Income statement Item Sales revenue Cost of goods sold Gross profit Operating expenses Operating profit (earnings before int. & taxes) interest Net profit before taxes Taxes Net profit after taxes Preferred dividend Earnings available for common shareholders Common dividend Retained Earnings 2015 2,000,000 1,000,000 1,000,000 500,000 500,000 100,000 400,000 80,000 320,000 10,000 310,000 290,000 20,000 2014 1,600,000 900,000 700,000 400,000 300,000 100,000 200,000 40,000 160,000 10,000 150,000 140,000 10,000 Balancesheet Balance sheet Item 2015 2014 Item 2015 2014 Current Assets Liabilities Cash 220,000 200,000 Current liabilities 200,000 180,000 Account receivable 100,000 80,000 Long-term debts 800,000 800,000 Inventory 400,000 400,000 Total liabilities 1,000,000 980,000 total current 720,000 680,000 Shareholders Equity assets Fixed assets Preferred stock (10,000 shares) 20,000 20,000 Total fixed assets 1,000,000 1,000,000 Common stock (20,000 60,000 60,000 shares) Accumulated retained 640,000 620,000 earnings Total assets 1,720,000 1,680,000 Total stockholders equity 1,720,000 1,680,000 DOL= (precise to two decimal points, e.g., 3.45.) DFL = (precise to two decimal points, e.g., 3.45.) DTL = (precise to two decimal points, e.g., 3.45.)