fn2640_week5_lab2

Capital Structure
A firm has sales of $10 million, variable costs of $4 million, fixed expenses of $1.5 million, interest costs of $2 million, and a 30 percent average tax rate.

1. Compute its DOL, DFL, and DCL.
2. What will be the expected level of EBIT and net income if next year's sales rise 10 percent?
3. What will be the expected level of EBIT and net income if next year's sales fall 20 percent?