CFA CFA Level 1 Question of the Week – Corporate Finance

# Question of the Week – Corporate Finance

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• exam_whiz
Participant
• Undecided
1

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

Meta Corpâ€™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
• 4

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!

• shannondaily
Participant
• Undecided
3

Woo! I got it right. ðŸ™‚

• rogersp188
Participant
• CFA Level 1
2

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 âœ”” even though the Degree of financial leverage is clearly 1.25…

Participant
• Undecided
2

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

• NaidenB
Participant
• CFA Level 1
1

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
Participant
• Undecided
1

That’s correct!