A corporation reports sales of $4,000,000, variable costs of $500,000, fixed ope
ID: 2667147 • Letter: A
Question
A corporation reports sales of $4,000,000, variable costs of $500,000, fixed operating costs of $1,250,000, and interest expense of $350,000. The corporation's EBIT is $3,250,000 and its marginal tax rate is 30%. If the corporation is able to increase its sales by 25%, thenAnswer
its EBIT will increase by 25% and its EPS will increase by 25%
its EBIT will increase by more than 25% and its EPS will increase by less than 25%
its EBIT and EPS will both increase, but less than 25% due to fixed costs and taxes
its EBIT will increase by more than 25% and its EPS will increase by more than the percentage increase in EBIT
Explanation / Answer
Here sales are expected to increase by 25%.
Therefore the new sales are =$4,000,000*125%
=$5,000,000
Variable costs are before was 12.5% on sales. Now the variable costs are
=12.5%*5,000,000
=$625,000
Fixed costs are remaining constant for the whole period.
Then the new EBIT is = $4,375,000
old EBIT is =$3,250,000
% of increased in EBIT is = (4,375,000-3,250,000)/3,250,000
=34.6%
Net income before sales are not increased by 25% is as follows.
EBIT = $3,250,000
(-) Interest expenses = 350,000
EBT = 2,900,000
Less: Taxes = 870,000
Net income = 2,030,000
After increasing the sales the net income is as follows.
EBTI = $4,375,000
(-) Interest expense = 350,000
EAT = 4,025,000
Less: Taxes = 1,207,500
Net income = 2,817,500
Assume that here no of shareholders are 100,000. Then Old EPS is
= Net income/No. shareholders
=2,030,000/100,000
Old EPS =2.03
Then the New EPS is = 2,817,500/100,000
New EPS =2.817
% of increased in EPS is = (2.817-2.03)/2.03
=38.76%
Therefore from the above conclusion we can say that,
EBIT is will increase by more than 25% and its EPS will increased by more than the % increased by EBIT.
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.