# Corporate Finance - Corporate Finance Section 2

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

 Company A Company B Number of units produced and sold 1.5 million 1.5 million Sale price per unit \$150 \$150 Variable cost per unit \$90 \$75 Fixed operating costs \$30 million \$60 million Fixed financing expenses \$15 million \$7.5 million Degree of operating leverage (DOL) ? 2.14 Degree of financial leverage (DFL) 1.33 1.17

• Option :
• Explanation :  Company A Company B DOL= Q (P - V) / Q (P - V) -F 1.5 (150 - 90) / 1.5 (150 - 90)- 30 = 1.5 1.5 (150 - 75) / 1.5 (150 - 75) -60 = 2.14 DFL= Q (P - V) - F / Q (P -V) - F - C 1.5 (150 - 90) - 30 / 1.5 (150 -90) - 30 - 15 = 1.33 1.5 (150 - 75) - 60 / 1.5 (150 -75) - 60 - 7.5 = 1.17 DTL= DOL x DFL 1.5 x 1.33 = 2.0 2.14 x 1.17 = 2.50
The DOL is lower for Company A than Company B (as per the table),meaning Company A’s operating income is less sensitive to a change in the units sold relative to Company B. Section 3.3, 3.4 and 3.5.

• A

Increase.  • B

Decrease.  • C

Does not change.  • Option : A
• Explanation : Bases of the following equation: DTL = [Q (P - V)] / [Q (P - V) - F - C] By switching to accelerated depreciation method, the fixed cost increases. Therefore, the DTL increases (i.e. the numerator does not change and denominator decreases).