Sinclair Manufacturing and Boswell Brothers Inc. are both involved in the production of brick for the homebuilding industry. Their financial information is as follows: |
Sinclair | Boswell | ||||
Capital Structure | |||||
Debt @ 11% | $ | 1,440,000 | 0 | ||
Common stock, $10 per share | 960,000 | $ | 2,400,000 | ||
|
|
|
|
||
Total | $ | 2,400,000 | $ | 2,400,000 | |
|
|
|
|
||
Common shares | 96,000 | 240,000 | |||
Operating Plan: | |||||
Sales (64,000 units at $20 each) | $ | 1,280,000 | $ | 1,280,000 | |
Variable costs | 1,024,000 | 640,000 | |||
Fixed costs | 0 | 314,000 | |||
|
|
|
|
||
Earnings before interest and taxes (EBIT) | $ | 256,000 | $ | 326,000 | |
|
|
|
|
||
|
The variable costs for Sinclair are $16 per unit compared to $10 per unit for Boswell. |
a. | If you combine Sinclair’s capital structure with Boswell’s operating plan, what is the degree of combined leverage? (Round your answer to 2 decimal places.) |
Degree of combined leverage | [removed] |
b. | If you combine Boswell’s capital structure with Sinclair’s operating plan, what is the degree of combined leverage? (Round your answer to the nearest whole number.) |
Degree of combined leverage | [removed] |
c. | In part b, if sales double, by what percentage will EPS increase? (Round your answer to the nearest whole percent.) |
EPS will increase by | [removed] % |
Hints
References
eBook & Resources