Strategic Finance
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From the following selected operating data, determine the DOL and comment on which company has the greater amount of business risk and why?
Sales
2500000
3000000
Fixed Cost
750000
1500000
Variable cost
15% of sales
25% of sales
Sales
2000000
Variable cost
1400000
Fixed Cost
400000 (includes 15% interest on 1 million borrowing
i.) Calculate DOL,DFL
ii.) What if sales increase by 100%
DOL =
%D EBIT or
Sales – Variable cost
%D Sales
Contribution margin
DFL =
EBIT
EBIT – Interest
DCL = DOL x DFL
Company A has EBIT of Rs. 2.5 million and its present borrowing are as follows:
14% term loans amounting to 4,000,000
Working Capital Borrowing @16% amounting to 3,300,000
Short term loans @15% amounting to 1,500,000
The sales of the company are growing and to support the extended demand the company proposes to obtain an additional bank loan of Rs. 2.5 million. EBIT is expected to increase by 20%. Calculate interest coverage ratio before and after the borrowing.
Company P
Company Q
Sales
1000
Contri. Margin
Interest
Calculate DOL, DFL, DCL
Assignment Question
Financial Leverage
Interest
1000