Question 12.A.3: Calculating Cash Flow and Accounting DOL PROBLEM: You have d...

Fundamentals of Corporate Finance

Calculating Cash Flow and Accounting DOL
PROBLEM: You have decided to calculate the operating leverage for the in-home computer-support business you are thinking about starting. What will Cash Flow DOL and Accounting DOL be in six months if EBIT is $2,000, FC is $3,000, and D&A is $1,000?
APPROACH: Use Equations 12.2 and 12.3 to calculate Cash Flow DOL and Accounting DOL, respectively.

$\begin{matrix} Cash \ Flow \ DOL &=& 1+ \frac{Fixed \ costs}{Pretax \ operating \ cash \ flows} = 1+\frac{FC}{EBITDA}\end{matrix}$ 12.2

\begin{matrix} Accounting \ DOL &=& 1+\frac{Fixed \ charges}{Accounting \ operating \ profits} &&&&& 12.3 \\ \\ &=& 1+\frac{FC + D\&A}{EBITDA-D\&A} \\ \\ &=& 1+\frac{FC+D\&A}{EBIT} \end{matrix}

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\begin{matrix} Accounting \ DOL&=&1...