1) You are provided with the following information: Firm X and Firm Y both sell the...
1) You are provided with the following information: Firm X and Firm Y both sell the same products at the same price; both firms are the same size with identical sales levels; Firm X has lower fixed costs and higher variable operating costs than Firm Y. Which firm has the greater variability in its operating profits?
- A. Firm X
- B. Firm Y
- C. Same variability of operating profits
- D. It would depend on tax effect on taxable income
2)
If EBIT = $20,000
Interest expense = $500
Net income = $5,000
Calculate DFL.
- A.
4
- B.
1.03
- C.
1
- D.
.98
Homework Answers
The answer is
FIRM Y
Since its fixed costs are higher and hence, operating income will be more variable
DFL = EBIT/EBT
= 20,000/19500
= 1.0256
I.e. 1.03
B
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