(Leverage and EPS) You have developed the following pro forma income statement f
ID: 2613303 • Letter: #
Question
(Leverage and EPS) You have developed the following pro forma income statement for your corporation: Sales $45,703,000. Variable costs (22,716,000). Revenue before fixed costs $22,987,000. Fixed costs(9,182,000). EBIT, $13,805,000. Interest expense (1,351,000). Earnings before taxes $12,454,000. Taxes (50%) (6,227,000).Net income $6,227,000.
a. If sales should increase by 30 percent, by 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 you answers to part a and b?
Explanation / Answer
Solution.
A. Calculation of increse in C and Net profit.
Change in E.B.I,T = $13,805,000 - 27,155,900 = 13,350,900
%Change = 13,350,900 / $13,805,000 x 100
= 96.71%
Net income increase = $6,227,000 - 19,578,900 = 13,351,900
%Change in Net income = 13,351,900 / $6,227,000 x 100 = 214.42%
Condition 2 :-
Earnings before interest and taxes = $13,805,000 - 8,357,900 = 5,447,100
% decrese in EBIT = 5,447,100 / $13,805,000 x 100 = 39.45%
Net income decrease = $6,227,000 - 779,900 = 54,47,100
% decrese in Net income = 54,47,100 / $6,227,000 x 100 = 87.47%
Condition 3 :-
c.If the firm were to reduce its reliance on debt financing such that interest expense were cut in half,
Interest expense = 1.351.000 reduce to half 675,500
Effect on condition 1 =
Net income increase = $6,227,000 - (19,578,900 + 675,500) = 14,027,400
%Change in Net income = 14,027,400 / $6,227,000 x 100 = 225.26%
Effect on condition 2 =
Net income decrease = $6,227,000 - (779,900 + 675,500) = 4,771,600
% decrese in Net income = 4,771,600 / $6,227,000 x 100 = 76.62%
Particular's Amount If sales should increase by 30 percent If sales decrease by 30 percent Sales $45,703,000 $59,413,900 $31,992,100 Variable costs ($22,716,000) ($22,716,000) ($22,716,000) Revenue before fixed costs $22,987,000 36,697,900 9,276,100 Fixed costs ($9,182,000) ($9,182,000) ($9,182,000) EBIT $13,805,000 27,155,900 8,357,900 Interest expense ($1,351,000) ($1,351,000) ($1,351,000) Earnings before taxes $12,454,000 25,804,900 7,006,900 Taxes (50%) ($6,227,000) ($6,227,000) ($6,227,000) Net income $6,227,000 19,578,900 779,900Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.