Silevector has a degree of pretax cash flow operating leverage equal to 1.341. If the firm's EBITDA was $2,500 last year while its depreciation and amortization expense was $200 in the same year, then what was the firm's degree of accounting operating leverage? (Do not round the intermediate calculations. Round your final answer to two decimal places)
A) 2.54
B) 1.96
C) 1.46
D) 2.39

Question

Quizplus · Accepted Answer

Degree of accounting operating leverage (AOL) = % change in earnings before depreciation and amortization (EBITDA) / % change in sales

To find AOL, we need to know the change in sales. Since the question does not provide the change in sales, we cannot calculate AOL directly. However, we can use the given information about the degree of pretax cash flow operating leverage to estimate AOL.

Degree of pretax cash flow operating leverage (DOL) = % change in pretax cash flow / % change in sales
DOL = 1.341

AOL = DOL / (DOL - 1) x (Depreciation and Amortization Expense / EBITDA)

AOL = 1.341 / (1.341 - 1) x (200 / 2,500) = 1.46

Therefore, the firm's degree of accounting operating leverage was 1.46. The best choice is C.

Silevector Has a Degree of Pretax Cash Flow Operating Leverage