Mark Smith Company Below Is an Income Statement for Mark

question 109

Multiple Choice

Mark Smith Company Below is an income statement for Mark Smith Company:
$\begin{array}{ll}\text { Sales } & \$ 400,000 \\\text { Variable costs } & (\underline{200,000}) \\\text { Contribution margin } & \$ 200,000 \\\text { Fixed costs } & (\underline{125,000}) \\\text { Profit before taxes }& \underline{\$ 75,000}\end{array}$ Refer to Mark Smith Company.What is the company's degree of operating leverage (DOL) ?

• A)2.67
• B)3.2
• C)5.33
• D)10.67

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Definitions:

M&M Proposition I

A theory in corporate finance that asserts that the market value of a company is independent of its capital structure.

Homemade Leverage

refers to the strategy wherein investors adjust the amount of leverage or debt in their investment portfolios on their own, rather than relying on the borrowing strategy of the companies in which they invest.

M&M Proposition

The Modigliani and Miller Proposition, theories that address the impact of capital structure on a company's value and cost of capital.