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