A New Restaurant Is Ready to Open for Business C) $$D F L = \frac { E B I T } { E B I T - I } = \frac { \$ 300,000 } { \$ 300,000 - \$ 120,000 } = 1.67 \times$$

question 2

Essay

A new restaurant is ready to open for business.It is estimated that the food cost (variable cost)will be 40% of sales,while fixed cost will be $450,000.The first year's sales estimates are $1,250,000.The cost to start up this restaurant will be $2,000,000.Two financing alternatives are being considered: (a)50% equity financing and 50% debt at 12%,or (b)all equity financing.Common stock can be sold at $5 per share.
A)Compute break-even point.
B)Compute DOL.
C)Compute DFL and DCL for both financing plans.
D)Include an explanation of what your computations mean.
A) B) $$\begin{array} { l } D O L = \frac { S - T V C } { S - T V C - F C } = \frac { \$ 1,250,000 - 0.40 ( \$ 1,250,000 ) } { \$ 1,250,000 - 0.40 ( \$ 1,250,000 ) - \$ 450,000 } \\D O L = \frac { \$ 750,000 } { \$ 300,000 } = 2.50 \times\end{array}$$ C) $$D F L = \frac { E B I T } { E B I T - I } = \frac { \$ 300,000 } { \$ 300,000 - \$ 120,000 } = 1.67 \times$$ $$D C L = \frac { S - T V C } { E B I T - I } = \frac { \$ 750,000 } { \$ 180,000 } = 4.17 \times = 2.50 \times 1.67$$ $$D F L = \frac { E B I T } { E B I T - I } = \frac { \$ 300,000 } { \$ 300,000 - \$ 0 } = 1.00 \times$$ $$D C L = \frac { S - T V C } { E B I T - I } = \frac { \$ 750,000 } { \$ 300,000 } = 2.50 \times = 2.50 \times 1.00$$ D)Subjective.

• A)Compute break-even point.
• B)Compute DOL.
• C)Compute DFL and DCL for both financing plans.
• D)Include an explanation of what your computations mean.
• B) \[\begin{array} { l } D O L = \frac { S - T V C } { S - T V C - F C } = \frac { \$ 1,250,000 - 0.40 ( \$ 1,250,000 ) } { \$ 1,250,000 - 0.40 ( \$ 1,250,000 ) - \$ 450,000 } \\ D O L = \frac { \$ 750,000 } { \$ 300,000 } = 2.50 \times \end{array}\]
• C) \[D F L = \frac { E B I T } { E B I T - I } = \frac { \$ 300,000 } { \$ 300,000 - \$ 120,000 } = 1.67 \times\] \[D C L = \frac { S - T V C } { E B I T - I } = \frac { \$ 750,000 } { \$ 180,000 } = 4.17 \times = 2.50 \times 1.67\] \[D F L = \frac { E B I T } { E B I T - I } = \frac { \$ 300,000 } { \$ 300,000 - \$ 0 } = 1.00 \times\] \[D C L = \frac { S - T V C } { E B I T - I } = \frac { \$ 750,000 } { \$ 300,000 } = 2.50 \times = 2.50 \times 1.00\]
• D)Subjective.

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Definitions:

Net Income

The amount of money remaining after all operating expenses, taxes, and interest have been deducted from total revenue.

Income Distribution

Refers to the manner in which total income is divided among the holders of different types of financial securities and assets.

Hybrid Method

An accounting technique that combines elements of both cash-based and accrual accounting to prepare financial statements.

Partnership

A legal arrangement where two or more individuals or entities engage in business together, sharing profits, losses, and liability.