1 (CF = cash flow) The degree of operating leverage is defined as:
a % change in Net Income caused by a % change in Operating CF
b % change in Operating CF caused by a % change in Net Income
c % change in Operating CF caused by a % change in Sales (or Quantity)
d % change in Net Income caused by a % change in Sales (or Quantity)
2 In general, as the level of sales (or, similarly, the quantity of output) gets higher & higher (ie, increases), the degree of operating leverage:
c remains constant
3 For the product line in the prior question, calculate the financial break-even quantity (rounded to the nearest unit)?
4 Calculate degree of operating leverage (DOL) for Louisville Slugger, a firm in Kentucky that makes baseball bats Louisville Slugger produces 155,000 bats per year, at a selling price of $30/bat and a variable cost of $26/bat Fixed costs are $420,000 Ignore depreciation expense and taxes
5 You’re considering purchasing a share of Emporium Pies, Inc common stock You expect to sell it at the end of 1 year for $3150 You will also receive a dividend of $225 at the end of the year (right before you sell the stock) If your required return on this stock is 12%, what is the most you would be willing to pay for the share of Emporium Pies stock now?
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