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problem1: Albatross Airline's fixed operating costs are 5.8 million dollar, and its variable cost ratio .20. The firm has $2 million in bonds outstanding with a coupon interest rate of 8 percent. Albatross has 30,000 shares of preferred stock outstanding, which pays a $2 yearly dividend. There are 100,000 shares of common stock outstanding. Revenues for the firm are 8 million dollar and the firm is in the 40% corporate income tax bracket.

[A] find out Albatross' degree of operating leverage

[B] find out its degree of financial leverage

[C] find out its degree of combined leverage and interpret this value

problem2: Suppose that all other factors remain unchanged; evaluate how a firm's breakeven point is affected by each of the following:

[A] The firm's direct labor costs rise as a result of a new labor contract.

[B] The firm finds it necessary to reduce the price per unit due to competitive conditions on the market.

[C] The occupational Safety and Health Administration requires the firm to install new ventilating equipment at its plant. [Suppose this action has no effect on worker productivity]

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  • Category:- Basic Finance
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