Doug Robinson Is Considering the Possibility of Opening His Own

question 86

Essay

Doug Robinson is considering the possibility of opening his own manufacturing facility. He expects first-year sales to be $800,000, and he feels that his variable costs will be approximately 40% of sales. His fixed costs in the first year will be $200,000.
Doug is considering two ways of financing the firm: (a) 40% equity financing and 60% debt at 10%, or (b) 100% equity financing. He can sell common stock to his relatives for $10 per share. Either way, he will need to raise $1,000,000.
-Calculate the Degree of Operating Leverage at the expected first-year sales volume.

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Definitions:

Nominal

Nominal values refer to monetary values or economic statistics not adjusted for inflation, reflecting their face value.

Real Interest Rate

The interest rate corrected for the effects of inflation.

Price Level

A measure of the average prices of goods and services in an economy at a given time period.

Real Wealth

The value of an individual's or entity's assets, taking into account the effects of inflation on purchasing power.