Consider a firm that has fixed costs of 8M. Its sales are 30M and the variable...

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Finance

Consider a firm that has fixed costs of 8M. Its sales are 30Mand the variable costs are 50% of sales. The firm uses both debtand equity and has an interest expense of 1M. There are notaxes.
Determine the firm’s operating leverage and financialleverage.
Assume that the sales increase by 10%. By how much percentagepoints will the firm’s EBIT increase?
What would be the resulting increase in Net Income?

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4.2 Ratings (809 Votes)

First we will calculate the Earnings before taxes or net income with the given values Sales 30M Variable costs 50 30M 15M Contribution Sales Variable cost 30M 15M 15M Fixed costs 8M Earnings before interest and taxes EBIT Contribution See Answer

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Consider a firm that has fixed costs of 8M. Its sales are 30Mand the variable costs are 50% of sales. The firm uses both debtand equity and has an interest expense of 1M. There are notaxes.Determine the firm’s operating leverage and financialleverage.Assume that the sales increase by 10%. By how much percentagepoints will the firm’s EBIT increase?What would be the resulting increase in Net Income?