PQR Manufacturing Corporation has $1,500,000 in debt outstanding.The company's before-tax cost of debt is 10%.Sales for the year totaled $3,500,000 and variable costs were 60% of sales.Net income was equal to $600,000 and the company's tax rate was 30%.If PQR's degree of total leverage is equal to 1.30,what is its degree of operating leverage?
A) 0.8962
B) 1.2281
C) 1.0179
D) 1.3719
E) 1.1064

Question

Quizplus · Accepted Answer

The degree of total leverage (DTL) is the product of the degree of operating leverage (DOL) and the degree of financial leverage (DFL). Given DTL = 1.30 and DFL can be calculated using the formula DFL = 1 + (Debt * Cost of Debt * (1 - Tax Rate)) / Net Income. Solving for DOL gives approximately 1.1064.

PQR Manufacturing Corporation Has $1,500,000 in Debt Outstanding