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7. The computation and interpretation of the degree of combined leverage (DCL)

You and your colleague, Kimani, are currently participating in a finance internship program at Campbell Construction. Your current assignment is to work together to review Campbells current and projected income statements. You will also assess the consequences of managements capital structure and investment decisions on the firms future riskiness. After much discussion, you and Kimani decide to calculate Campbells degree of operating leverage (DOL), degree of financial leverage (DFL), and degree of total leverage (DTL) based on this years data to gain insights into Campbells risk levels.

The most recent income statement for Campbell Construction follows. Campbell is funded solely with debt capital and common equity, and it has 2,000,000 shares of common stock currently outstanding.

	This Years Data	Next Years Projected Data
Sales	$80,000,000	$86,000,000
Less: Variable costs	32,000,000	34,400,000
Gross profit	$48,000,000	$51,600,000
Less: Fixed operating costs	28,000,000	28,000,000
Net operating income (EBIT)	$20,000,000	$23,600,000
Less: Interest expense	4,000,000	4,000,000
Taxable income (EBT)	$16,000,000	$19,600,000
Less: Tax expense (40%)	6,400,000	7,840,000
Net income	$9,600,000	$11,760,000
Earnings per share (EPS)	$4.80	$5.88

Given this information, complete the following table and then answer the questions that follow. When performing your calculations, round your EPS and percentage change values to two decimal places.

Campbell Construction Data
DOL (Sales = $80,000,000)	?
DFL (EBIT = $20,000,000)	?
DTL (Sales = $80,000,000)	?

Everything else remaining constant, assume Campbell Construction decides to immediately repay 50% of a bank loan prior to its maturity. How would this affect Campbells DOL, DFL, and DCL?

	The DOL would be expected to .
	The DFL would be expected to .
	The DTL would be expected to .