Module 3: Operating Leverage, Module 4 : Financial Leverage
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In-class Project: Based on the following information on Levered Company, answer these questions:

1) If sales increase by 10%, what should happen to operating income?
2) If operating income increases by 10%, what should happen to EPS?
3) If sales increase by 10%, what should be the effect on EPS?.

Levered Company

Sales (100,000 units)
$1,400,000
Variable Costs
$800,000
Fixed Costs
$250,000
Interest paid
$125,000
Tax rate
34%
Common shares outstanding
100,000

Degree of Operating Leverage from Sales Level (S)

DOLs =
= 1.714

Degree of Financial Leverage

DFL =
= 1.556

 

Levered Company 10% increase in sales (Levered Company)

Sales (110,000 units)
1,540,000
Variable Costs
(880,000)
Fixed Costs
(250,000)
EBIT
410,000 ( +17.14%)
Interest
(125,000)
EBT
285,000
Taxes (34%)
(96,900)
Net Income
188,100
EPS
$1.881 ( +26.67%)