You have developled the following pro forma income statement for your corporatio
ID: 2650771 • Letter: Y
Question
You have developled the following pro forma income statement for your corporation:
It represents the most recent year’s operations, which ended yesterday. Your supervisor in the controller’s office has just handed you a memorandum asking for written responses to the following questions:
a. If sales should increase by 30%, by what percent would earnings before interest and taxes and net income increase?
b. If sales should decrease by 30%, by what percent would earnings would earning 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 parts a and b?
Sales $45,735,000 Variable Costs (22,848,000) Revenue before fixed costs 22,887,000 Fixed costs (9,237,000) EBIT 13,650,000 Interest expense 1,333,000 Earnings before taxes 12,317,000 Taxes (50%) (6,158,500) Net income 6,158,500Explanation / Answer
Workings:
Revenue before fixed cost /EBIT = 22887000/13650000
= 1.68
EBIT /(EBIT -I) =13650000/(13650000-1333000)
= 13650000/12317000
=1.11
Degree of combined leverage = (1.68)*(1.11)
=1.86times
a)If sales increase by 30% EBIT and Net income will increase by 30 *1.86
= 55.80%
B)If sale decrease by 30 % EBIT and net income will decrease by 55.80%
c)If interest become Half = 1333000/2 =666500
EBIT /(EBIT-Interest) = 13650000/(13650000-666500)
=13650000/12983500
=1.051
degree of combined leverage will be = 1.051*1.677
= 1.763
If sales increase by 30% net income and EBIT will increase by =1.763 *30 = 52.89%
If decrease by 30% then EBIT will decrease by 52.89%
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.