Question
INTERMEDIATE The Hurricane Lamp Company forecasts that next years sales will be $6 million. Fixed operating costs are estimated to be $800,000, and the variable
INTERMEDIATE The Hurricane Lamp Company forecasts that next years sales will be $6 million. Fixed operating costs are estimated to be $800,000, and the variable cost ratio (that is, variable costs as a fraction of sales) is estimated to be 0.75. The firm has a $600,000 loan at 10 percent interest. It has 20,000 shares of $3 preferred stock and 60,000 shares of common stock outstanding. Hurricane Lamp is in the 40 percent corporate income tax bracket.
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Calculate Hurricane Lamps degree of financial leverage (DFL) at the EBIT level corresponding to sales of $6 million using the following:
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The definitional formula (Equation 14.3)
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The simpler computational formula (Equation 14.4)
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What is the economic interpretation of this value?
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Calculate Hurricane Lamps degree of combined leverage (DCL) using the following:
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The definitional formula (Equation 14.5)
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The simpler computational formula (Equation 14.7)
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The degree of operating and financial leverage calculated in Parts b and c
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What is the economic interpretation of this value
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