Question
Two firms, Sky and Moon, from the same industry reported the following income statements. Sky, Inc.20192020 Sales $110,000 $150,000 -COGS and Other Variable Operating Costs
Two firms, Sky and Moon, from the same industry reported the following income statements.
Sky, Inc.20192020 Sales $110,000 $150,000 -COGS and Other Variable Operating Costs - 77,000 - 105,000 -Fixed Operating Costs - 15,000 - 15,000 EBIT 18,000 30,000 -Interest -0 -0 EBT 18,000 30,000 -Taxes -5,400 -9,000 Net Income $ 12,600 $ 21,000Moon, Inc.20192020 Sales $110,000 $150,000 -COGS and Other Variable Operating Costs - 66,000 - 90,000 -Fixed Operating Costs - 25,000 - 25,000 EBIT 19,000 35,000 -Interest -5,000 -5,000 EBT 14,000 30,000 -Taxes -4,200 -9,000 Net Income $9,800 $ 21,000
Required:Calculate the operating leverage for the two firms (using 2019 sales as the base) and then compare the leverage of all types used by the two firms and discuss its impact on the firms' cost of capital.
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