Operating Leverage
A Project has fixed costs of $1000 per year, depreciation charges of
$500 a year, revenue of $6000 a year, and variable costs equal to
two-thirds of revenues.
 
a.  If sales increase by 5 percent, what will be the increase in pretax profits?
 
b.  What is the degree of operating leverage of this project?
 
c.  Confirm that the percentage change in profits equals DOL times the
percentage change in sales.
 
 
 

IPO Underpricing 
Having heard about IPO underpricing, I put in an order to my broker
for 1,000 shares of every IPO he can get for me. After 3 months, my
investment record is as follows:
 
IPO          Shares Allocated         Price per           Initial 
                 to me                   Share             Return
 
A               500                       $10                 7%
B               200                        20                 12
C             1,000                         8                 -2
D                 0                        12                 23
 
a.  what is the average underpricing of this sample of IPO's?
 
b.  what is the average initial return on my "portfolio" of shares
purchased from the four IPOs I bid on?
Calculate the average initial return, weighting by the amount of money
invested in each issue.
 
c. why have I performed so poorly relative to the average initial
return on the full sample of IPOs?  What lessons do you draw from my
experience?

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Clarification of Question by calcal15-ga on 05 Apr 2005 10:14 PDT

please respond before 9PM EST tonight. thank you

1) an increase of sales of 5% results in sales of $6,300 and variable
costs of $4200.  Earnings before interest and taxes = $6,300-$4200 -
fixed costs of $1000 - depreciation of $500 = $600.

Earnings before interest and taxes without the increased sales =
$6,000 - $4000 - $1000 - $500 = $500.  The percentage increase in
earnings before interest and taxes = ($600 -$500)/$500*100 = 20%

Degree of Operating Leverage = (sales - variable costs)/ earnings
before interest and taxes = ($6,000 -$4000)/$500 = 4.  4 times 5% =
20%

2) the average underpricing is simply the average of the four returns,
or (7% + 12% -2% + 23%)/4 or 10%.

Our return = [(500*$10) 7% + (200*$20) 12% + (1000*$8) (-2%) + (0*$12)
23%]/(500*$10) + (200*$20) + (1000*$8)  + (0*$12) ] = 3.24%

As we have seen, it is much easier to obtain shares of fairly or even
overpriced IPOs than it is to obtain shares of greatly underpriced
IPOs.  Attractive IPOs are usually reserved for large institutional
customers or very wealthy clients and are rarely made available to the
general public.

Your tips are appreciated.

Sincerely,

Wonko