Corporate Finance Question

CFA Level I Corporate Finance
#1
  1. The following information is available for a firm:

Revenue:

£ 800,000

Variable Cost:

400,000

Fixed Cost:

200,000

Operating Income:

200,000

Interest:

60,000

Net Income:

£ 140,000

The firm’s degree of total leverage (DTL) is closest to:

A. 1.43.

B. 2.00.

C. 2.86.

Answer = C

DTL=DOL*DFL

DOL=1.6667

DFl=1.2

#2

If you multiply 1.2*1.6667=2

#3

Take a look at these articles:

#4

Your figures for DOL and DFL seem not to be correct.

DOL = Contribution Margin/EBIT = (800-400)/200 = 2.00x

DFL = EBIT/EBT = 200/ (200-60) = 1.43x

DTL = DOL x DFL = 2.00 x 1.43 = 2.86x

One way to calculate directly the DTL:

DTL = Contribution Margin/EBT = (800-400)/(200-60) = 2.86x

So answer C should be the correct one.

Best,

Oscar