The formulas are: [pic] [pic] OPERATING LEVERAGE Operating leverage measures how a given percentage change in sales affects net operating income. It is a measure of volatility in net income caused by high fixed expenses relative to variable expenses. [pic] Use the income statements for Company X and Y to compute: a. Breakeven point in units and sales dollars. b. Margin of safety. c. Degree of operating leverage. d. The change in net income caused by a 10% increase
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Research and Application 6-34, page 278 1. From looking at the income statement presented on page 50, is prepared using an absorption format. Then on page 33 it is prepared using a contribution format. The annual report says that the contribution format income statement shown on page 33 is used for internal reporting purposes; but, Benetton has chosen to include it in the annual report anyway. The contribution format income statement treats all cost of sales as variable costs. The selling, general
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% per unit $ Units sold Sales $20,000.00 100% $20.00 1000 Variable expenses $12,000.00 60% $12.00 Contribution Margin $8,000.00 40% $8.00 Fixed Expenses $6,000.00 Net operating income $2,000.00 1. Total contribution margin $8,000.00 Total units sold 1,000 units Contribution margin per unit $8.00 per unit 2. Total contribution margin $8,000.00
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levels: a. Leverage Ratio = 4.61% (LT Debt/Total Assets) b. Interest Coverage = 40x (EBIT/Interest Expense) 2. Excess cash on hand: $95.1 million 3. Good stability of business operations resulting in stable earnings and cashflows going forward, further enforced by patents. 4. No major capital requirements to continue business operations. 5. Sound asset base that can be used to raise debt as collateral . Overall Valuation Approach Since the leverage ratio for Congoleum
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CHAPTER 14 FINANCIAL AND OPERATING LEVERAGE Q.1. A.1. Explain the concept of financial leverage. Show the impact of financial leverage on the earnings per share. The use of fixed-charges sources of funds, such as debt and preference capital, along with owners’ equity in the capital structure is known as financial leverage (or gearing or trading on equity). The financial leverage employed by a company is intended to earn more on the fixed charges funds than their costs. The surplus will increase the
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L. The data given in column L matches most with that of Electric and gas utility. A notable feature here would have to be their low inventory which is quite low (2%) meaning they do not need many goods for their line of business. This is mainly so because their revenue comes from electricity and natural gas sales which are a form of natural emissions in one way or another. Plant and equipment tends to be high in this industry as there is heavy machinery in power plants used to convert natural gas
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of the relevant practice sets. The questions on the exam will cover the reading material, and will be very similar to those in the practice sets. Question 1. Suppose you discover a treasure chest of $10 billion in cash. (a) Is this a real or financial asset? (b) Is society any richer for the discovery? (c) Are you wealthier? (d) Can you reconcile your answers to (b) and (c)? Is anyone worse off as a result of the discovery? Question 2. Consider Fig. 1.5 in BKM6. (a) Are these American gold
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Urban Outfitters (In Thousands) Profitability: Gross Margin =37% Activity: Payable Turnover= 28.2 Leverage: Debt to Assets= 0.25 Liquidity: Current= 3.5 Market: Book Value per Share= 0.009277 Gap (In Millions) Profitability: Gross Margin= 65% Activity: Payable Turnover=13.6 Leverage: Debt to Assets= 0.61 Liquidity: Current= 1.76 Market: Book Value per Share= 0.00625 Urban Outfitters is an average profitable company with a gross margin of 37% where Gap’s is above average at 65%. Gap’s
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of the relevant practice sets. The questions on the exam will cover the reading material, and will be very similar to those in the practice sets. Question 1. Suppose you discover a treasure chest of $10 billion in cash. (a) Is this a real or financial asset? (b) Is society any richer for the discovery? (c) Are you wealthier? (d) Can you reconcile your answers to (b) and (c)? Is anyone worse off as a result of the discovery? Question 2. Consider Fig. 1.5 in BKM6. (a) Are these American gold
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Financial Managment – First Investments, Inc.: Analysis of Financial Statements Team 4: Nathalie Strookman, Dieter Wolfram, Demis Busropan Background Problem Definition The 1994 Basic Industries annual report shows a decline in the return on owners’ equity. This has got the portfolio people worried. An analysis has to be made of the way the company has achieved its return on equity over the last 10 years. The focus should especially be on the 1993-1994 period and the quality of the returns
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