Finance

1 (CF = cash flow) The degree of operating leverage is defined as:

a % change in Net Income caused by a % change in Operating CF

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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:

a increases

b decreases

c remains constant

3 For the product line in the prior question, calculate the financial break-even quantity (rounded to the nearest unit)?

a 2000

b 1364

c 2255

d 1000

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

a 310

b 110

c 210

d 267

e 148

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?

a $2083

b $3375

c $3013

d $2857

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