Question

You are the manager of a project that has an operating leverage rating of 2.8 and a required return of 14 percent. Due to the current state of the economy, he expects sales to decrease by 7 percent next year. What change should you expect in operating cash flows next year given your sales forecast?

a) 19.60 percent decrease

b) 16.03 percent decrease

c) 13.46 percent decrease

d) 5.60 percent decrease

e) 2.74 percent decrease

Answer 1

The change in operating cash flows next year given the sales forecast would be a 19.60 percent decrease.

Step-by-step explanation:

To calculate the change in operating cash flows, we need to multiply the percentage change in sales by the operating leverage rating. In this case, the sales are expected to decrease by 7 percent. Multiply the operating leverage rating of 2.8 by 7 percent to get the change in operating cash flows. The answer is 19.60 percent decrease.