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 40%.If PQR's degree of total leverage is equal to 1.40,what is its degree of operating leverage? Do not round intermediate calculations.
A) 0.9496
B) 1.0713
C) 1.0470
D) 1.5217
E) 1.2174

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 = 1.40 and DFL can be calculated using the formula: DFL = 1 + (Debt * Cost of Debt * (1 - Tax Rate)) / Net Income. Solving for DOL gives approximately 1.2174.

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