Principles of Managerial Finance

548 PART 4 Long-Term Financial Decisions

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e. Use the formula for degree of operating leverage to determine the DOL at

10,000 units.

12 – 9 Degree of operating leverage—Graphical Levin Corporation has fixed operat-

ing costs of $72,000, variable operating costs of $6.75 per unit, and a selling

price of $9.75 per unit.

a. Calculate the operating breakeven point in units.

b. Compute the degree of operating leverage (DOL) for the following unit sales

levels: 25,000, 30,000, 40,000. Use the formula given in the chapter.

c. Graph the DOL figures that you computed in part b(on the yaxis) against

sales levels (on the xaxis).

d. Compute the degree of operating leverage at 24,000 units; add this point to

your graph.

e. What principle do your graph and figures illustrate?

12 – 10 EPS calculations Southland Industries has $60,000 of 16% (annual interest)

bonds outstanding, 1,500 shares of preferred stock paying an annual dividend of

$5 per share, and 4,000 shares of common stock outstanding. Assuming that the

firm has a 40% tax rate, compute earnings per share (EPS) for the following lev-

els of EBIT:

a. $24,600

b. $30,600

c. $35,000

12 – 11 Degree of financial leverage Northwestern Savings and Loan has a current cap-

ital structure consisting of $250,000 of 16% (annual interest) debt and 2,000

shares of common stock. The firm pays taxes at the rate of 40%.

a. Using EBIT values of $80,000 and $120,000, determine the associated earn-

ings per share (EPS).

b. Using $80,000 of EBIT as a base, calculate the degree of financial leverage

(DFL).

c. Rework parts aand bassuming that the firm has $100,000 of 16% (annual

interest) debt and 3,000 shares of common stock.

12 – 12 DFL and graphical display of financing plans Wells and Associates has EBIT of

$67,500. Interest costs are $22,500, and the firm has 15,000 shares of common

stock outstanding. Assume a 40% tax rate.

a. Use the degree of financial leverage (DFL) formula to calculate the DFL for

the firm.

b. Using a set of EBIT–EPS axes, plot Wells and Associates’ financing plan.

c. If the firm also has 1,000 shares of preferred stock paying a $6.00 annual

dividend per share, what is the DFL?

d. Plot the financing plan, including the 1,000 shares of $6.00 preferred stock,

on the axes used in part b.

e. Briefly discuss the graph of the two financing plans.

12 – 13 Integrative—Multiple leverage measures Play-More Toys produces inflatable

beach balls, selling 400,000 balls a year. Each ball produced has a variable oper-