Two firms, Green and Red, from the same industry reported the following income statements. Green, Inc. 2018 2019 Sales $110,000 $150,000 –COGS and...

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Finance

Two firms, Green and Red, from the same industry reported thefollowing income statements.
Green, Inc.
2018
2019
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
$ 21,000
Red, Inc.
2018
2019
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 twofirms (using 2018 sales as the base) and then compare the leverageof all types used by the two firms and discuss its impact on thefirms' cost of capital.

Answer & Explanation Solved by verified expert

3.8 Ratings (673 Votes)

There are two types of leverage which we calculate to understand the impact in a given company a Operating Leverage b Financial Leverage Operating Leverage Its the fixed operating expenses in a given company when changed can See Answer

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Two firms, Green and Red, from the same industry reported thefollowing income statements.Green, Inc.20182019Sales$110,000$150,000–COGS and Other Variable Operating Costs- 77,000- 105,000–Fixed Operating Costs- 15,000- 15,000EBIT18,00030,000–Interest- 0- 0EBT18,00030,000–Taxes- 5,400- 9,000Net Income$ 12,600$ 21,000Red, Inc.20182019Sales$110,000$150,000–COGS and Other Variable Operating Costs- 66,000- 90,000-Fixed Operating Costs- 25,000- 25,000EBIT19,00035,000–Interest- 5,000- 5,000EBT14,00030,000–Taxes- 4,200- 9,000Net Income$ 9,800$ 21,000 Required: Calculate the operating leverage for the twofirms (using 2018 sales as the base) and then compare the leverageof all types used by the two firms and discuss its impact on thefirms' cost of capital.

Green, Inc.	2018	2019
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	$ 21,000

Red, Inc.	2018	2019
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