CFA CFA Level 1 Question of the Week – Corporate Finance

Question of the Week – Corporate Finance

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  • exam_whiz
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    Meta Corp. sells 15,000 units of its product at a price of $10 per unit. The company’s fixed costs are $12,000 and interest expense is $3,000. The variable cost per unit is $7, and the company’s EBIT is $15,000.

    Meta Corp’s degrees of operating leverage and financial leverage are:

    • Degree of operating leverage = 1.25, Degree of financial leverage = 1.36
    • Degree of operating leverage = 1.36, Degree of financial leverage = 1.25
    • Degree of operating leverage = 1.42, Degree of financial leverage = 1.19
    NaidenB
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    Financial Leverage = EBIT / EBIT – interest -> 15000/12000 = 1.25; Operating Leverage = Sales – TVC / Sales – TVC – FC = 150000 – 105000 / 150000 – 105000 – 12000 = 1.36

    exam_whiz
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    That’s correct!

    shannondaily
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    Woo! I got it right. 🙂 

    rogersp188
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    Too bad the 300 hours practice question #38 correct answer choice is displayed as “(B) Degree of operating leverage = 1.36, Degree of financial leverage = 1.57 ✔” even though the Degree of financial leverage is clearly 1.25…

    christine
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    Hi  @rogersp188 

    So sorry for the mixup! We were in the middle of modifying the question. 

    Since EBIT is also generally = Revenue – Fixed Costs – Variable Costs, we wanted to make sure the EBIT number matched accordingly. Hence the question and answers have been modified slightly from @exam_whiz’s original version. 

    In our modified version:
    EBIT 
    = Rev – FC – VC 
    = (15,000 x $10) – $12,000 – (15,000 x $7)
    = $33,000

    The question should be fully fixed now. So sorry again for the mixup!

    Prashantadobe
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    as financial leverage= EBIT/(EBIT-Interest)   and Operating Leverage=Sales-FC/ EBIT

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