Compute the degree of the operating leverage

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Reference no: EM132673332

Lord of Chips produces a special set meal which is distributed nationwide through their fast food franchisees. The following information has been obtained from the pro-forma income statements of Lord of Chips.Projected Income Statement (all values are thousands)

Sales $30,600
Variable cost $18,360
Fixed operation cost $8,160
Interest expenses $1,080
Preferred dividends $576
Corporate Income tax rate 40%

Required:

- Compute the degree of the operating leverage (DOL), the degree of financial leverage (DFL) and the total leverage (DTL). Interpret your computations.

- Lord of Chips has entered into a contract with another fast food network which will assist the company to increase its sales by 10% in the coming year. Use DOL, DFL, and DTL to calculate the percentage changes in EBIT and earnings available for common shareholders. Justify your calculations.

- The two dimensions of risk are viewed as business and financial risk. Distinguish between these two risks.

Reference no: EM132673332

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