# Corporate Finance - Corporate Finance Section 2

>>>>>>>>Corporate Finance Section 2

• A

Net Profit Margin.  • B

WACC.  • C

DFL.  • 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

• A

1.6.  • B

2.1.  • C

2.7.  • 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.

 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

• A

3.1.  • B

3.4.  • C

6.2.  • 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.

 Income Statement \$ millions Revenues 1100 Variable costs 450 Fixed costs 225 EBIT 425 Interest 70 Taxable Income 355 Tax 142 Net Income 213

• A

1.20.  • B

1.53.  • C

1.83  • Option : C
• Explanation : DTL = [Q (P – V)] / [Q (P – V) – F – C] = (1100 – 450) / 355 = 1.83