A B D E F G 1 Firm A Firm B 2 3 units 140.00 units 500.00 4 Price 850.00 Price 50.00 5 6 7 8 9 10 Variable Cost Fixed Costs Interest Expense Tax Rate Sales 140 units at 850 dollars 50.00 45,000.00 1,000.00 Variable Cost Fixed Costs Interest Expense 12.00 12,000.00 1,000.00 0.30 Tax Rate 0.30 119,000.00 Sales 500 units at 50 dollars 25,000.00 11 Less Variable Costs (50 at 140 units) 7,000.00 Less Variable Costs (12 at 500 units) 6,000.00 12 Fixed costs 45,000.00 Fixed costs 12,000.00 13 Earnings before interest and taxes (EBIT) 67,000.00 Earnings before interest and taxes (EBIT) 7,000.00 14 Interest expense 1,000.00 Interest expense 1,000.00 15 Earnings before taxes (EBT) 66,000.00 Earnings before taxes (EBT) 6,000.00 16 Income tax expense 17 Earnings after taxes (EAT) 19,800.00 46,200.00 Income tax expense 1,800.00 Earnings after taxes (EAT) 4,200.00 18 19 20 Part 1 Using the Income Statements (above), compute the degree of operating leverage, 21 degree of financial leverage, degree of combined leverage, and the break-even point in units for each firm. 22 23 a. Degree of operating leverage 24 25 b. Degree of financial leverage 26 27 28 c. Degree of combined leverage 29 d. Break-even point in units 30 31 Part 2 Which firm is riskier? Why? times times times times times times units units