Question

Praxis Corp. forecasts the following income statement for the next year:

Income Statement For the Year Ended on December 31
Net sales $960,000
Less: Variable costs 532,000
Less: Fixed costs 127,000
EBIT, or NOI $301,000
Less: Interest 191,000
EBT $110,000
Less: Taxes 44,000
Net income $66,000

Praxis Corp. uses no preferred stock in its capital structure. Ccalculate the degrees of operating, financial, and total leverage for Praxis Corp.
a. DOL
b. DFL
c. DTL

Answer 1

Answer: a. 1.42

b) 2.74

c) 3.89

Step-by-step explanation:

a) The Degree of Operating Leverage measures how much operating Income will change by if Sales change.

It is calculated with the formula,

= (Sales - Variable Costs) / (Sales - Variable Costs - fixed costs)

= (960,000 - 532,000) / (960,000 - 532,000 - 127,000)

= 1.42

b) The Degree of financial leverage measures how much Income will change due to a change in operating Income.

The formula is,

=Earnings before Interest and tax / Earnings before Interest and tax - Interest or just Earning before tax

= 301,000/110,000

= 2.74

c. Degree of Total Leverage is a measure of how sensitive the net income of a company is to a change in goods produced and/or sold.

It is calculated by multiplying DOL and DFL.

= 1.42 * 2.74

= 3.89

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