Question

Clipe ASSIC 8. Analyzing riskiness using a firm's degree of leverage Select the degree of leverage that completes the following sentence. The is the percentage change in earnings before interest and taxes (EBIT) that results from a given percentage change in sales. Expert Analysts Resources (EAR) has provided you with the following information about three companies you are currently evaluating: Three Waters Co. General Products Co. Degree of Operating Leverage (DOL) Degree of Financial Leverage (DFL) Praxis Corp. 2.0 5.5 According to this information, which company would be considered the risklest? Praxis Corp. General Products Co. Three Waters Co. Type here to search о в е в 9

Answer 1

a ) The degree of total leverage is the percentage change in EBIT that results from a given percentage change in sales.

b) out of the follwing companies -

1. Praxis Corporation ist riskiest because it has the highest amount of total leverage.

The amount of total leverage = degree of financial leverage × degree of operating leverage

Praxis corp total leverage = 2× 5.5 = 11

Three waters conpany TL = 2× 5 = 10

GENRAL products = 5 × 2.1 = 10.5

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