1

1) You are provided with the following information: Firm X and Firm Y both sell the...

Question

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

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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