Problem 1: You are supplied with the follwing analytical income statement for the your firm. It reflects last year's operations.
Sales $16,000,000
Variable Costs $8,000,000
Revenue before fixed costs $8,000,000
Fixed Costs $4,000,000
EBIT $4,000,000
Interest Expense $1,500,000
Earning before taxes $2,500,000
Taxes $1,250,000
Net Income $1,250,000
a) At what level of output, what is the degree of operating leverage?
b) What is the degree of financial leverage?
c) What is the degree of combined leverage?
d) If the sales should increase by 20%, by what percent would Earnings before taxes (and net income) increase?
e) What is your firm's break even point in sales dollars?
Problem 2: Discuss the risk return relationship involved in managing firm's working capital.