Question

The following is a list of selected information for Arsenal Co. for the fiscal year. Unit Change Forecasted Operations 100 2,000.00 Sales with 40.00% Increase 140 3,080.00 40 1,080.00 Sales in units (millions) Earnings before interest and taxes (EBIT) Less: Interest Earnings before taxes Less: Taxes (40%) Net income Earnings per share (30 million shares) (175.00) $1,825.00 730.00 1,095.00 $36.50 (175.00) $2,905.00 1,162.00 1,743.00 $58.10 (0.00) $1,080.00 (0.00) 648.00 $21.60 You are an employee for Arsenal Co., and your boss needs help assessing the level of risk associated with the firm's current financial position. Begin by calculating the degree of financial leverage for the change between forecasted operations and the operational increase of 40.00%. 0.38X . 1.06% . 0.60x 1.10x Your boss says, "Looking good so far. However, I would like to know how we stack up against our strongest competitor, Hotspurs Co." Compare the degree of operating leverage of Hotspurs Co. with that of Arsenal Co. and then answer the following question. All else being equal, is Arsenal Co. more risky than, less risky than, or as equally risky as Hotspurs Co., considering that the degree of financial leverage for Hotspurs Co. is 1? More risky Not enough information given Less risky

Answer 1

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ANSWER 1 : 1.10X

ANSWER 2: MORE RISKY

- 2x Insert Delete Format Σ AutoSum : A Fill Sort & Clear Filter Editing Find & Select Cells ACCOUNTS latest - Microsoft Excel (Product Activation Failed) File Home Insert Page Layout Formulas Data Review View Add-Ins % Cut Calibri 11 A A = = = V Wrap Text General Ea Copy Paste B I U D A E SF Merge Merge & Center Center $ - % % Format Painter 4:0 .00 8. Conditional Format Cell Formatting as Table Styles Clipboard Font Alignment Number Styles F551 E F G Formula Bark 550 551 %CHANGE IN EPS = CHANGE IN EPS/BASE EPS 552 %CHANGE IN EPS = 21.60/36.50 553 %CHANGE IN EPS = 59.18% 554 %CHANGE IN EPS = н M N O 59% 555 556 557 558 559 %CHANGE IN NET OPERATING INCOME = %CHANGE IN NET OPERATING INCOME = %CHANGE IN NET OPERATING INCOME = %CHANGE IN NET OPERATING INCOME = CHANGE IN EBIT/BASE EBIT 1080/2000 54.00% 54% 560 561 ANSWER 1 562 563 DEGREE OF FINANCIAL LEVERAGE = DEGREE OF FINANCIAL LEVERAGE = DEGREE OF FINANCIAL LEVERAGE = DEGREE OF FINANCIAL LEVERAGE = %CHANGE IN EPS/%CHANGE IN EBIT 59.18%/54% 1.0959 1.10 564 565 ANSWER 2 566 567 MORE RISKY HIGHER THE FINANCIAL LEVERAGE, HIGHER THE RISK 568 FIFO CASH BUDGET ferences budget 45 days cycle ROE, BV MV ratio VARIANCE BEP, OL FL ratios DETROIT float B-S profit loss SALES BUDGET dupont DIFF ANALYSIS BO. ovel < 130% Rea 2. 9 * * O ENG 28-11-2019