Appendix 13A Degree of Leverage
Answers and Solutions
13A–1
Web Appendix 13A
Degree of Leverage
Answers to Questions
13A-1 An increase in a firm’s operating leverage would call for the firm to use less debt in its optimal
capital structure. A decrease in the firm’s operating leverage would call for the firm to use more
13A-2 Short-term leases are not capitalized. By replacing fixed assets with short-term leases (which
would be off the balance sheet) the firm would be increasing its operating leverage (leasing
expense would be operating costs), lowering its financial leverage (because leases would be off the
balance sheet), but the net effect of total leverage would be the same—no change.
13A-3 DTL = DOL DFL.
The greater the use of fixed operating costs as measured by the degree of operating leverage,
the more sensitive EBIT will be to changes in sales.
13A–2
Answers and Solutions
Appendix 13A Degree of Leverage
Solutions to Problems
13A-1 S = $1,000,000; VC = $600,000; F = $250,000; DOL = ?
DOLS =
F VC S
VC S
−−
−
$600,000 $1,000,000
−
13A-2 EBIT = $500,000; I = $200,000; T = 25%; DFL = ?
13A-3 a. DOL = (S – VC)/(S – VC – F)
b. Step 1: Calculate DFL:
Step 2: Calculate the percentage increase to net income:
c. Step 1: Calculate DTL:
Step 2: Calculate the percentage increase to net income:
13A-4 a. DOLA =
$675,000 0,000)($6.75)(20 000)($12)(200,
0,000)($6.75)(20 000)($12)(200,
−−
−
Appendix 13A Degree of Leverage
Answers and Solutions
13A–3
DOLB =
$401,250 0,000)($8.25)(20 000)($12)(200,
0,000)($8.25)(20 000)($12)(200,
−−
−
b. DFLA =
=
$90,000 $675,000 $1,350,000 $2,400,000
$675,000 $1,350,000 $2,400,000
−−−
−−
c. DTL =
I F V) Q(P
V) Q(P
−−−
−
.
DTLA =
$90,000 $675,000 $6.75) 2200,000($1
$6.75) 2200,000($1
−−−
−
=
$285,000
$1,050,000
= 3.68.
13A–4
Answers and Solutions
Appendix 13A Degree of Leverage
d. DTLA = DTLB = 2.90.
2.90 =
I $675,000 $6.75) ($12 200,000
$6.75) ($12 $200,000
−−−
−
=
I $375,000
$1,050,000
−