LEVERAGE

THEORIES:

1 TRUE
2 TRUE
3 TRUE
4 FALSE
5 TRUE
6 TRUE
7 TRUE
8 TRUE
9 FALSE
10 TRUE
11 TRUE
12 FALSE
13 TRUE
14 FALSE
15 TRUE

PROBLEM A:
1. ( )
( )

2. At breakeven point, the Total Revenue is equal to Total Cost, hence, zero
net income

3. ( )

( )

 At Breakeven point, the DOL is equal to zero. However, if the sales volume
is lower than the breakeven point, the DOL will be in negative.
4. ( )

( )

( )

( )

PROBLEM B:

5.

PROBLEM C:
6.

PROBLEM D:
7.

EBIT P3,600,000
Less: Interest 1,200,000
EBT 2,400,000
PROBLEM E:

8.

PROBLEM F:

1.

2. Computation for the net income using the CVP format at 60,000 units
Sales (60,000 units x P90) P5,400,000
Variable cost (60,000 units x P60) 3,600,000
Contribution margin 1,800,000
Fixed Manufacturing Overhead and (650,000)
Expenses
Operating Income (EBIT) 1,150,000
Interest expense (100,000)
Net income before tax (EBT) P1,050,000
Since there is no tax rate provided, it is assumed that the net income before tax is
also the net income after tax.

3.

4.
 Computation for the net income using the CVP format at 65,000 units
Sales (65,000 units x P90) P5,850,000
Variable cost (65,000 units x P60) 3,900,000
Contribution margin 1,950,000
Fixed Manufacturing Overhead and (650,000)
Expenses
Operating Income (EBIT) 1,300,000
Interest expense (100,000)
Net income before tax (EBT) P1,200,000
Since there is no tax rate provided, it is assumed that the net income before tax is
also the net income after tax.

5.

6.

7.

OR

DTL = DOL x DFL

= 1.5 x 1.08333
= 1.625

8. The increase of the unit sales to 65,000 units or an increase of 5,000 units shows a
8.333% increase in sales.
9.

( )
( )

PROBLEM G:
1. Current Cost of Equity using Current Beta of 1.15 (at equity portion of 80%)
( )
( )

2. Unlevered Beta
( )( )

( )( )

( )( )

3. New (Levered) Beta (at debt-to-equity ratio of 60%:40%)

( )( )
( )( )

4. New Cost of Equity using New Beta of 1.9 (at equity portion of 40%)
( )
( )
5. The cost of equity increased by 4.5% from 11.9% to 16.4%

6. WACC = [KD(1-TR) DR] + [KE ER]

= [8% (1- 0.4) (60%)] + [ 16.4% (40%)]
=9.44 %