Question 19 (1 point)

For this and the next 2 questions. The following data are for two firms that are similar in every way except in terms of their operating and financial leverage. Which firm has the higher DEGREE OF OPERATING LEVERAGE (DOL)?

	Firm A	Firm B
Revenues	850,000	25,000,000
Less: Variable cost	125,000	11,000,000
Contribution margin	725,000	14,000,000
Less: Fixed cost	120,000	2,100,000
EBIT	605,000	11,900,000
Less: Interest charges	75,000	720,000
EBT	530,000	11,180,000
Less: Taxes (40%)	212,000	4,472,000
Earnings after tax	318,000	6,708,000
Dividends (25%)	79,500	1,677,000
Addition to retained earnings	238,500	5,031,000

Question 19 options:

1)

Firm A

2)

Firm B

3)	The two firms have identical DOL

4)	Incomplete data to determine

Question 20 (1 point)

Which firm has the higher DEGREE OF FINANCIAL LEVERAGE (DFL)?

Question 20 options:

1)

Firm A

2)

Firm B

3)	The two firms have identical DOL

4)	Incomplete data to determine