Question

In 2019, Alafaya had sales of $950,000 and paid taxes of $84,000. Because of the low interest rate environment, the firm also borrowed some money from the local bank and paid $40,000 in interest expense. In addition, the firm incurred Variable Costs and Fixed Costs of $270,000 and $400,000 respectively. If operating income increases by 7%, what should be the increase in earnings per share?

7.0%

8.17%

19.83%

17.0%

2.83%

Answer 1

Answer: 8.17%

Explanation:

	Present	At 7% increase
Sales	950,000
Variable Costs	270,000
Fixed costs	400,000
Operating Income (EBIT)	280,000	299,600	(280,000*1.07)
Interest	40,000	40,000
EBT	240,000	259,600
Taxes @ 35% *	84,000	90,860
Net Income	156,000	168740
Number of shares (Assumed)	100,000	100,000
Earning per share	1.56	1.69
Increase in earning per share		0.13
% of Increase in share		8.17%
Note:
* 84000/240000 =35%