PROBLEM 18

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 @ 12% $ 1,680,000 $0

Common stock,

10 per share $1,120,000 $2,800,000

Total $2,800,000 $2,800,000

Common shares 112,000 280,000

Operating Plan:

Sales (68,000 units at $25 each) $700,000 $1,700,000

Variable costs 1,224,000 816,000

Fixed costs 0 318,000

Earnings before interest and taxes (EBIT) $476,000 $ 566,000

The variable costs for Sinclair are $18 per unit compared to $12 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

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

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 %