Problem #1 (22 marks)

You have developed the following income statement for your corporation which represents the most recent years operations which ended yesterday.

Sales	$45,750,000
Variable Costs	-22,800,000
Gross Profit	$22,950,000
Fixed Costs	-9,200,000
Depreciation	-4,000,000
EBIT	$9,750,000
Interest	-1,350,000
EBT	$8,400,000
Tax 40%	-3,360,000
Net Income	$5,040,000
Shares Outstanding	2,000,000
EPS =Net income / # shares	$2.52

Your supervisor in the controllers office just handed you a memo asking for written responses to the following questions.

1. Calculate the degree of operating leverage for the firm. (2 marks). Please round your final answer to 2 decimals.
2. Calculate the degree of financial leverage for the firm. (2 marks). Please round your final answer to 2 decimals.
3. Calculate the degree of combined leverage for the firm. (2 marks). Please round your final answer to 2 decimals.
4. If the company is able to increase their sales by 25%, what percentage increase in EBIT would you expect to observe? (2 marks)
5. If the company is able to increase their sales by 25%, what percentage increase in EPS would you expect to observe? (2 marks)
6. If the sales increase by 25%, what will the new EPS be? (2 marks)
7. If the companys sales decrease by 25%, what will the new EPS be? (2 marks)
8. If EBIT increases by 5%, what will the new EPS be? (2 marks)
9. If the company were to reduce its reliance on debt financing such that interest expense were cut in half, how would this affect your answer to:

1. part (d)? (1 mark)
2. part (e)? (3 marks)

If the companys sales decrease by 7%, what will the new EBIT be? (2 marks)