Corporate Finance - Corporate Finance Section 2
46. Which of the following is not affected by changes in tax rate?
- Option : C
- Explanation : DFL is not affected by the tax rate whereas WACC and net profit margin are both impacted by changes in tax rate.
- Option : C
- Explanation : Analysts need to understand a company’s use of operating and financial leverage to forecast future cash flows and select an appropriate discount rate.
| Income Statement | $ millions |
| Revenues | 15.2 |
| Variable Operating Costs | 9.8 |
| Fixed Operating Costs | 3.5 |
| Operating Income | 1.9 |
| Interest | 1.0 |
| Taxable Income | 0.9 |
| Tax | 0.2 |
| Net Income | 0.7 |
- Option : B
- Explanation : DFL = (Operating income) / (Operating income – Interest expense) = [Q(P - V) - F] / [Q(P - V) - F - C] = $1.9 / $0.9 = 2.11.
49. Using the company’s income statement presented, its degree of operating
| Income Statement | $ millions |
| Revenues | 10.5 |
| Variable Operating Costs | 6.8 |
| Fixed Operating Costs | 2.5 |
| Operating Income | 1.2 |
| Interest | 0.4 |
| Taxable Income | 0.8 |
| Tax | 0.2 |
| Net Income | 0.6 |
- Option : A
- Explanation : DOL = (Revenues – Variable operating costs) / (Revenues – Variable operating costs –
Fixed operating costs)
= Q(P - V) / [Q(P - V) - F]
= (10.5 – 6.8) / (10.5 – 6.8 – 2.5) = 3.1.
50. A manufacturing company has the following income statement.
| Income Statement | $ millions |
| Revenues | 1100 |
| Variable costs | 450 |
| Fixed costs | 225 |
| EBIT | 425 |
| Interest | 70 |
| Taxable Income | 355 |
| Tax | 142 |
| Net Income | 213 |
The degree of total leverage for the company is closest to:.
