Mara ltd. has a sales price of $ 80.00 per unit and a variable cost of $66 per unit, fixed costs are $60,000 no debt, and sales of 125,000 units per year. Yatta ltd. has a sales price of $200.00 per unit and a variable cost of $140.00 per unit with fixed costs of $2,700,000 and sales of 100,000 units per year. Yatta ltd. also has interest payments of $1,200,000 annually. Both companies are in the 30% tax bracket
Required:
Calculate degree of operating leverage (DOL), degree of financial leverages (DFL), and degree combined leverage for both Mara and Yatta and discuss their implication to both companies (9 marks)
b) Two firms X and Y are in the same risk class and both have profit before interest and tax of $50 million. Firm X is all equity financed and its cost of equity financed and its cost of equity Ksu=18%. Firm Y has $100 million outstanding debt at a cost of Kd=10%. Corporation tax amounts to 30% and assumptions of MM hold.
Required:
Establish the value and weighted average cost of capital of firms X and Y (6 marks)

Answer rating: 100% (QA)

The detailed answer for the above question is provided below a Degree of operating leverage DOL The degree of operating leverage DOL measures the sensitivity of a companys operating income to changes ... View the full answer