(Leverage and EPS) You have developed the following pro forma income statement f
ID: 2383434 • Letter: #
Question
(Leverage and EPS) You have developed the following pro forma income statement for your corporation: Sales $45800000 Variable costs (22755000) Revenue before fixed costs $23045000 Fixed costs (9144000) EBIT $13901000 interest expense (1294000) Earnings before taxes $12607000 Taxes(50%) (6303500) Net income $6303500 It represents the most recent years operations, which ended yesterday. Your supervisor in the controllers office has just handed you a memorandum asking for written responses to the following questions: a. If sales should increase by 30 percent, y what percent would earnings before interest and taxes and net income increase? b. If sales should decrease by 30 percent, by what percent would earnings before interest and taxes and net income decrease? c. If the firm were to reduce its reliance on debt financing such that interest expense were cut in half, how would this affect your answers to part a and b?
Explanation / Answer
Answer:a
% of change EBIT=20814500-13901000/13901000
=49.73%
Net income=(9760250-6303500)/6303500
=54.84%
Answer:b
% of change EBIT=6987500-13901000/13901000
=-49.73%
Net income=(2846750-6303500)/6303500
=-54.84%
Answer:c PartA
% of change EBIT=20814500-13901000/13901000
=49.73%
Net income=(10083750-6303500)/6303500
=59.97%
PartB:
% of change EBIT=6987500-13901000/13901000
=-49.73%
Net income=(3170250-6303500)/6303500
=-49.71%
Present Change Particulars Amount ($) Amount ($) Sales 45800000 59540000 Less: Variable cost 22755000 29581500 Contribution 23045000 29958500 Less:Fixed cost 9144000 9144000 EBIT 13901000 20814500 Less:Interest 1294000 1294000 EBT 12607000 19520500 Less:Tax 6303500 9760250 Net income 6303500 9760250Related Questions
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