Question 7 (10 points) Lord of Chips produces a special set meal which is distributed nationwide...

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Question 7 (10 points) Lord of Chips produces a special set meal which is distributed nationwide through their fast food franchisees. The following information has been obtained from the pro-forma income statements of Lord of Chips. Projected Income Statement (all values are thousands) Sales $30,600 Variable cost $18,360 Fixed operation cost $8,160 Interest expenses $1,080 Preferred dividends $576 Corporate Income tax rate 40% Required: i. Compute the degree of the operating leverage (DOL), the degree of financial leverage (DFL) and the total leverage (DTL). Interpret your computations. (4 Points) ii. Lord of Chips has entered into a contract with another fast food network which will assist the company to increase its sales by 10% in the coming year. Use DOL, DFL, and DTL to calculate the percentage changes in EBIT and earnings available for common shareholders. Justify your calculations. (2 points) iii. The two dimensions of risk are viewed as business and financial risk. Distinguish between these two risks. (4 Points) Question 7 (10 points) Lord of Chips produces a special set meal which is distributed nationwide through their fast food franchisees. The following information has been obtained from the pro-forma income statements of Lord of Chips. Projected Income Statement (all values are thousands) Sales $30,600 Variable cost $18,360 Fixed operation cost $8,160 Interest expenses $1,080 Preferred dividends $576 Corporate Income tax rate 40% Required: i. Compute the degree of the operating leverage (DOL), the degree of financial leverage (DFL) and the total leverage (DTL). Interpret your computations. (4 Points) ii. Lord of Chips has entered into a contract with another fast food network which will assist the company to increase its sales by 10% in the coming year. Use DOL, DFL, and DTL to calculate the percentage changes in EBIT and earnings available for common shareholders. Justify your calculations. (2 points) iii. The two dimensions of risk are viewed as business and financial risk. Distinguish between these two risks. (4 Points)

Answer rating: 100% (QA)

i To compute the degree of operating leverage DOL financial leverage DFL and total leverage DTL we can use the following formulas DOL fracPercentage change in EBITPercentage change in sales DFL fracPe... View the full answer