Reference no: EM132500850
It is December 31. Last year, Praxis Corporation had sales of $12,000,000, and it forecasts that next year's sales will be $12,840,000. Its fixed costs have been and are expected to continue to be $900,000, and its variable cost ratio is 40.00%. Praxis's capital structure consists of a $13.5 million bank loan, on which it pays an interest rate of 6%, and 300,000 shares of common equity. The company's profits are taxed at a marginal rate of 35%.
Given this data, complete the following sentences:
1. The percentage change in the company's sales is ?
2. The percentage change in EBIT is ?
3. The degree of operating leverage (DOL) at $12,840,000 is ?
There are several ways to use and interpret a firm's DOL value. Consider the following statement and indicate whether it accurately reflects the meaning or an appropriate use of a firm's DOL value.
Assume that a firm's fixed costs remain constant across a range of sales values. As a result, its DOL will vary across the range of sales values.
True or False: This statement accurately describes a firm's DOL.
False
True
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