MSW Ltd. is a premium fruits distributor and is expecting $100,000 in sales for the coming year, along with $40,000 in variable costs, $10,000 in fixed costs and $20,000 in interest expenses. The marginal corporate tax rate is 20%.

(a) Calculate the degree of operating leverage (DOL), the degree of financial leverage (DFL), and the degree of total leverage (DTL) for MSW Ltd.

(b) Suppose sales is 20% more than expected. Using a suitable result from part (a), find the percentage change in net income from expected. 

(c) Use your result in part (b) to discuss the meaning of leverage.

(d) Under what circumstances will there be no operating leverage? (4 marks) (e) Suppose MSW Ltd. would like to sell new equity and use the proceeds to repay all of its debt. Discuss the impact on DOL, DFL, and DTL. 

Answer rating: 100% (QA)

a DOL change in EBIT change in sales 100000 100000 100000 100000 1 DFL change in EPS change in EBIT 100000 40000 10000 20000 100000 40000 10000 20000 ... View the full answer