Question: Financial Accounting A company named Taylor Industries is trying to decide on its use of operating and financial leverage from among four choices. Their interest expense is calculated as the interest rate multiplied by debt. The tax rate is 40%. Option Fixed Costs Variable Costs Debt Interest Rate 1 $30,000 60% of Sales $0 0% 2 $70,000 50% of Sales $0 0% 3 $30,000 60% of Sales $400,000 8% 4 $70,000 50% of Sales $400,000 8% What is their Degree of Operating Leverage under Option 1 if sales are $250,000?

SUBJECT: FINANCIAL ACCOUNTING

Which of the following calculations is correct if sales are $25,000, operating profit after tax is $1,000, the tax rate is 30%, there are no ‘other comprehensive income’ items, operating liabilities (OL) are $5,000, the short-term borrowing rate (STBC) is 3% after tax, and the asset turnover ratio (ATO) is 2?   1. Operating liability leverage (OLLEV) = 0.286   2. RNOA = 0.092   3. RNOA = 0.066   4. Operating profit margin after tax = 0.046

General Account

QUESTION: FINANCIAL ACCOUNTING INC. HAS INTERNATIONAL, SALES OF $150. FIXED OPERATING COSTS OF $20, AND A VARIABLE COST RATIO OF 0.55. IT HAS HAS 40 COMMON SHARES OUTSTANDING AND A TAX RATE OF 0.26. WHAT IS INTERNATIONAL, INC.'S DOL?

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Consider the following income statement for Larry & Harry drug stores: Revenue - 90mm Variable costs- 48mm Interest on debt- 6mm Depreciation- 0 mm It’s tax rate is 25% and the book value of its equity is 150mm. What is L&H’s coverage ratio? A) 0.18 B) 5.25 C) 6 D) 7 E) 8 F)15

You have the following information about two firms, Debt Free, Incorporated and Debt Spree, Incorporated. Both firms have the same prospects for sales and EBIT, and both have the same level of assets, tax rate and borrowing rate. They differ in their use of debt financing. Scenario Bad year Normal year Good year Total assets Tax rate Debt Equity Borrowing rate Sales Interest expense for Debt Free Interest expense for Debt Spree $200 $275 $380 Debt Free $ 250 21% EBIT $12 $ 34 $ 51 $0 $ 250 16% Required: a. Calculate the interest expense for each firm: Debt Spree $ 250 21% $150 $ 100 16%

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