Task 1:

Assume the following information about the firm:

Expected number of units produced and sold	100,000
Fixed operating costs (per year)	$120,000
Price per unit	$4.00
Variable cost per unit	$2.00
Total assets	$500,000
Interest rate on the debt	6%
Income tax rate	40%

The firms assets are financed with 50% debt and 50% equity.

1. Given the data, calculate the firms expected revenue.

2. Calculate the firms expected operating income (EBIT).

3. Calculate the firms net income and return on equity if operating income is 10% higher than expected. Complete the table below.

Firms financials if EBIT is 10% higher than expected
EBIT
Interest expense
Income before taxes
Taxes (40%)
Net income
Shareholders equity
Return on equity (ROE)

Hint: ROE = Net income / Shareholders equity

4. What is the firms degree of operating leverage at a sales volume of 100,000 units? If sales increased by 10%, what would be the percentage change in operating income?