Computation of operating leverage, financial and combined leverage.
1. Assuming that all other factors remain unchanged, determine how a firm's breakeven point is affected by each of the following:
The firm finds it necessary to reduce the price per unit due to competitive conditions on the market.
The firm's direct labor costs increase as a result of a new labor contract.
The occupational Safety and Health Administration requires the firm to install new ventilating equipment at its plant. (Assume this action has no effect on worker productivity)
2. Albatross Airline's fixed operating costs are $5.8 million, and its variable cost ratio os .20. The firm has $2 million in bonds outstanding with a coupon interest rate of 8%. Albatross has 30,000 shares of preferred stock outstanding, which pays a $2 annual dividend. There are 100,000 shares of common stock outstanding. Revenues for the firm are $8 million and the firm is in the 40% corporate income tax bracket.
Compute Albatross' degree of operating leverage
compute its degree of financial leverage
compute its degree of combined leverage and interpret this value
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