5 Computing and interpreting the degree of operating leverage (DOL) It is December 31 Last year, Carter Chemical Co had sales of $16,000,000, and it forecasts that next years sales will be $14,880,000 Its fixed costs have been and are expected to continue to be $6,400,000, and its variable cost ratio is 12 50 Carters capital structure consists of a $13 5 million bank loan, on which it pays an interest rate of 9 , and 250,000 shares of common equity The companys profits are taxed at a marginal rate of 40 Given this data, complete the following sentences The percentage change in the companys sales is The percentage change in Carters EBIT is The degree of operating leverage (DOL) at $14,880,000 is There are several ways to use and interpret a firms DOL value Consider the following statement and indicate whether it accurately reflects the meaning or an appropriate use of a firms DOL value At sales of $24 million, Firm Xs DOL is 1 75, and Firm Cs DOL is 6 50 Firm C exhibits a lower level of business risk than Firm X True or False This statement accurately describes a firms DOL False True

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Question: 5. Computing and interpreting the degree of operating leverage (DOL) It is December 31. Last year, Carter Chemical Co. had sales of $16,000,000, and it

5. Computing and interpreting the degree of operating leverage (DOL)

It is December 31. Last year, Carter Chemical Co. had sales of $16,000,000, and it forecasts that next years sales will be $14,880,000. Its fixed costs have been and are expected to continue to be $6,400,000, and its variable cost ratio is 12.50%. Carters capital structure consists of a $13.5 million bank loan, on which it pays an interest rate of 9%, and 250,000 shares of common equity. The companys profits are taxed at a marginal rate of 40%.

Given this data, complete the following sentences:

	The percentage change in the companys sales is .
	The percentage change in Carters EBIT is .
	The degree of operating leverage (DOL) at $14,880,000 is .

There are several ways to use and interpret a firms DOL value. Consider the following statement and indicate whether it accurately reflects the meaning or an appropriate use of a firms DOL value.

At sales of $24 million, Firm Xs DOL is 1.75, and Firm Cs DOL is 6.50. Firm C exhibits a lower level of business risk than Firm X.

True or False: This statement accurately describes a firms DOL.

False

True

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