Exam 8: Financial Planning and Control

The degree of operating leverage for ABC Inc.is 3.5, and the degree of operating leverage for XYZ Corporation is 7.0.According to this information, which firm is considered to have greater business risk?

Which of the following is a key determinant of operating leverage?

Breakeven analysis is the method of determining the point at which sales will just cover ____ costs.

Elephant Books sells paperback books for $7 each.The variable cost per book is $5.At current annual sales of 200,000 books, the publisher is just breaking even.It is estimated that if the authors' royalties are reduced, the variable cost per book will drop by $1.Assume authors' royalties are reduced and sales remain constant; how much more money can the publisher put into advertising (a fixed cost) and still break even?

The degree of financial leverage gives an indication of how a change in EBIT will affect EPS.

Other things held constant, a high degree of total leverage will mean that a relatively small change in sales will result in a large change in EPS.

Lumpy assets primarily affect the turnover of fixed assets and, consequently, the financial requirements associated with the expansion of operations.

The higher a firm's operating leverage, the higher is its business risk.

Forecasting financial requirements for a firm involves determining how much money the firm will

Two key objectives of financial planning and control are to avoid cash squeezes and to improve profitability.

The degree of financial leverage (DFL) is an index number that measures the effect of a change in sales on the financial breakeven point.

Compuvac Company has just completed its first pass forecast using the projected balance sheet method.The firm has determined that it needs $4 million in new debt which can be sold at par with a 10% annual coupon.Additionally, the firm will sell 500,000 shares of new common equity at $18.10 per share.Next year's expected dividend is $0.48 per share.The firm expects that taxes will be $160,000 less under the second pass than they were under the first pass based on a 40% tax rate.Given this information, what is the incremental change in AFN for Compuvac going from the first pass to the second pass?

Stromburg Corporation makes surveillance equipment for intelligence organizations.Its sales are $75,000,000.Fixed operating costs, including research and development, are $40,000,000, while variable costs amount to 30% of sales.Stromburg plans an expansion which will generate additional fixed costs of $15,000,000, decrease variable costs to 25% of sales, and also permit sales to increase to $100,000,000.What is Stromburg's DOL at the new projected sales level?

Projected Balance Sheet Method Trident Food Corporation Trident Food Corporation generated the following income statement for the most recent fiscal year, which ended December 31, 2010: Each item of inventory Trident Foods produces has a selling price of $20. -Refer to Trident Food Corporation.What is the degree of operating leverage for Trident Foods?

If any firm with a positive net worth is operating its fixed assets at full capacity, if its dividend payout ratio is 100 percent, and if it wants to hold all financial ratios constant, then for any positive growth rate in sales, the firm will require external financing.

Everything else equal, the higher the DFL is for a firm, the closer its operations are to its financial breakeven point.

Which of the following statements is correct?

What is the next step in the financial planning process after a firm develops a sales forecast?

If EBIT doubles when sales doubles, then the firm's degree of operating leverage must be exactly two.

The objective of financing the income statement under the projected balance sheet method is to determine how much income the company will earn and then retain for reinvestment in the business during the period that is forecasted.