Wachowicz's Web Workout WEB EXERCISES FOR DISCERNING FINANCE STUDENTS

### PART VI: THE COST OF CAPITAL, CAPITAL STRUCTURE, AND DIVIDEND POLICY Chapter 16: Operating and Financial Leverage Visit Wachowicz's Web World

 Exercise 16.1 Break-Even Analysis

CCH Business Owner's Toolkit contains information on financing, taxes, regulations, laws, and marketing. Read the section entitled " Breakeven Analysis."
http://www.toolkit.cch.com/
http://www.toolkit.cch.com/text/P06_7530.asp

Q. Given the information in the Lilian's Bakery example, what is Lilian's Bakery's degree of operating leverage (DOL) at the 80,000 loaves level of production and sales? Using your DOL figure, what is the percent increase in operating profit for a sales increase from 80,000 to 100,000 loaves (i.e., a 25% sales increase)? Is the expected percent change in operating profit confirmed by the numbers contained in the Lilian's Bakery discussion?

 Exercise 16.2 Operating Leverage

Visit the CCH Business Owner's Toolkit and read the section entitled " Operating Leverage."
http://www.toolkit.cch.com/
http://www.toolkit.cch.com/text/P06_7540.asp

Q. Does the "operating leverage" discussion seem to focus on a firm's absolute level of fixed assets, relative level of fixed costs (i.e., fixed costs to total cost, or fixed costs to sales), or proximity to the firm's break-even point? How might this web site's discussion of "operating leverage" be improved?

 Exercise 16.3 Plot of Degree of Operating Leverage (DOL) Versus Quantity Produced and Sold

WIMS (WWW Interactive Mathematics Service) at www.unice.fr provides a module that will enable you to draw, save, and print graphs.

Use the WIMS module to draw, save, and print a graph of "degree of operating leverage (DOL)" versus "quantity produced and sold" for the Awful Kinawful Bicycle Helmet Company. Assume that the company's break-even point equals 4,000 units. (TIPS: Make use of the fact that DOL = Q/(Q - QBE) can be rewritten as:

y = x*(x - 4000)^-1

where y stands for DOL and x stands for Q. Also, set the "x variable" range from 0 to 8000; and, set the "y variable" range from -3 to 5.)