Introduction to Finance

a. 
Compute and interpret the DOL, DFL, and DCL in 2016. Assume 
the components of the costs of goods sold (COGS) are all variable 
costs.
b. 
Compute and interpret the DOL, DFL, and DCL in 2017. Assume 
the components of the COGS are all variable costs.
c. 
Why did these numbers change between 2016 and 2017?
18. 
Using the income statements from the Mount Lewis Copy Cen-
ters for 2016 and 2017 in Problem 17, fi nd the percentage change in 
sales, EBIT, and net income. Use them to compute the DOL, DFL, 
and degree of combined leverage (DCL).
19. 
Here’s a recent income statement from TC1 Telecommunications 
Services Inc. (TC1). Numbers are in millions of dollars:
Sales $53.7
Costs of goods sold 
20.2
Depreciation 
13.9
EBIT $19.6
Interest expense 
12.4
EBT 
$ 7.2
Taxes (25%) 
1.8
Net Income 
$ 5.4
a. 
Compute TC1’s DFL, DOL, and DCL if one-half of the costs of 
good sold are variable costs and one-half are fi xed costs.
b. 
Assume during the current year TC1’s sales rise to $59.5 mil-
lion. What is your estimate of TC1’s net income this year?
c. 
Assume during the current year TC1’s sales fall to $49.3 mil-
lion. What is your revised estimate for TC1’s net income?
20. 
Challenge Problem
Company A1 intends to raise $3 million by 
either of two fi nancing plans:
Plan A: Sell 100,000 shares of stock at $30 net to fi rm
Plan B: Issue $3 million in long-term bonds with a 10 percent coupon
The fi rm expects an EBIT of $1 million. Currently A1 has 50,000 
shares outstanding and no debt in its capital structure. Its tax rate is 
34 percent.
a. 
What EBIT indiff erence level is associated with these two pro-
posals?