Important: EXCEL Spreadsheet Must be Used for this Problem.
Per your request, Table 14-1 is included as an attachment.
The Hurricane Lamp Company forecasts that next year’s sales will be $6 million. Fixed operating costs are estimated to be $800,000, and the variable cost ratio (that is, variable costs as a fraction of sales) is estimated to be 0.75. The firm has a $600,000 loan at 10 percent interest. It has 20,000 shares of $3
a)
Answer: EPS (Sales = $6 million) = $5.40
b) Calculate Hurricane Lamp’s degree of operating leverage (DOL) at a sales level of $6 million using the following:
- The definitional formula (Equation 14.1)
- The simpler, computational formula (Equation 14.2)
- What is the economic interpretation of this value?
Answer: DCL = 2.778
c) Calculate Hurricane Lamp’s degree of financial leverage (DFL) at the EBIT level corresponding to sales of $6 million using the following:
- The definitional formula (Equation 14.3)
- The simpler computational formula (Equation 14.4)
- What is the economic interpretation of this value?
d) Calculate Hurricane Lamp’s degree of combined leverage (DCL) using the following:
- The definitional formula (Equation 14.5)
- The simpler computational formula (Equation 14.7)
- The degree of operating and financial leverage calculated in Parts b and c
What is the economic interpretation of this value?
Table 14 -1 is attached. Thank you.
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Please answer section d) only
Please answer section d) only
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