Question

B15-11

​(Leverage and​ EPS)  You have developed 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 25%​percent, by what percent would earnings before interest and taxes and net income​ increase?

b.  If sales should decrease by 25 ​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 parts a and b​?

a.  If sales should increase by 25​%, the percentage change in earnings before interest and taxes is ______%. ​(Round to two decimal​ places.)

Sales	$	45,750,000
Variable costs		-22,800,000
Revenue before fixed costs	$	22,950,000
Fixed costs		-9,200,000
EBIT	$	13,750,000
Interest expense		-1,350,000
Earnings before taxes	$	12,400,000
Taxes (50%)		-6,200,000
Net income	$	6,200,000

Answer 1