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Lord of Chips produces a special set meal which is distributed nationwide through their fast food franchisees. The following information has been obtained from the pro-forma income statements of Lord of Chips.Projected Income Statement (all values are thousands)
Sales $30,600Variable cost $18,360Fixed operation cost $8,160Interest expenses $1,080Preferred dividends $576Corporate Income tax rate 40%
Required:
- Compute the degree of the operating leverage (DOL), the degree of financial leverage (DFL) and the total leverage (DTL). Interpret your computations.
- Lord of Chips has entered into a contract with another fast food network which will assist the company to increase its sales by 10% in the coming year. Use DOL, DFL, and DTL to calculate the percentage changes in EBIT and earnings available for common shareholders. Justify your calculations.
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