2 BEC questions

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  • November 9, 2019 at 10:11 pm #2788557
    Ralphie Dos Nachos
    Participant

    1. Becker defines Operating leverage as “degree to which a company uses fixed operating costs over variable costs” which makes sense (excludes fixed interest costs which is associated with financial leverage). However, on AICPA sample written comm. about operating leverage, they go on about how one option would lead to interest expense payments increasing operating leverage. Is that not a contradiction of Becker? or am I missing something.

    2. With Net Present Value, lets say you have cash inflows from an investment over 5 years with first 2 years being $20,000 each, the 3rd year being $40,000, and then years 4 and 5 being $30,000 each….

    would you use for yrs 1&2 the $PV of annuity for 2 periods
    yr.3 pv of $1 for 3 periods
    yrs4&5 the PV of annuity for 2 period again? or would it be PV of $1 for 4 periods, and PV of $1 for 5 periods?

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  • November 10, 2019 at 1:15 pm #2789127
    Cobalt60
    Participant

    For the second question I guess I would discount each cash flow individually and not use an annuity at all???

    For the first question I guess I would say the interest expense payments increase leverage because they are fixed costs. That seems consistent with what you note as the definition from Becker?

    Maybe somebody smarter could answer up.

    November 11, 2019 at 1:30 am #2790093
    ezakipocky
    Participant

    It would be PV of $1 for 4 periods, and PV of $1 for 5 periods

    PV of $1 annuity for 5 period = PV of $1 in period 1 + PV of $1 in period 2 + … + PV of $1 in period 5

    AUD 7/3
    BCE 81
    REG 7/15
    FAR 8/18

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