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:

Homemade Dividends

The concept where investors sell a portion of their portfolio to create cash flow, as an alternative to relying on traditional dividends from investments.

Dividend Policy

A company's strategy or guidelines for making dividend payments to its shareholders.

Share Value

The price at which a particular share of stock is traded on the market, determined by supply and demand.

Ex-dividend Date

The date on which a stock trades without its dividend, meaning that the seller is entitled to the dividend, not the buyer.