Corporate Finance - Corporate Finance Section 2

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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.
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48. Using the firm’s income statement presented below, its degree of financial leverage is closest to:

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.
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49. Using the company’s income statement presented, its degree of operating

Income Statement $ millions
Revenues10.5
Variable Operating Costs6.8
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.
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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

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