PROBLEM:

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 20 percent, by what percent would earnings before interest and taxes and net income increase?

b.If sales should decrease by 20 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?

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QUESTIONS:

A.If sales should increase by 20%, the percentage change in earnings before interest and taxes is (?)%. (Round to two decimal places.)

If sales should increase by 20%, the percentage change in net income is (?)%. (Round to two decimal places.)

B.If sales should decrease by 20%, the percentage change in earnings before interest and taxes is (?)%. (Round to two decimal places.)

If sales should decrease by 20%, the percentage change in net income is (?)%. (Round to two decimal places.)

C.If sales should increase by 20% and interest expense should decrease by 50%, the percentage change in earnings before interest and taxes is (?)%. (Round to two decimal places.)

If sales should increase by 20% and interest expense should decrease by 50%, the percentage change in net income is (?)%. (Round to two decimal places.)

If sales should decrease by 20% and interest expense should decrease by 50%, the percentage change in earnings before interest and taxes is (?)%.(Round to two decimal places.)\

If sales should decrease by 20% and interest expense should decrease by 50%, the percentage change in net income is (?)%. (Round to two decimal places.)

ndt i Data Table - X rnin Sales $ 45,670,000 (22,715,000) com S ings 22,955,000 (9,153,000) con S Variable costs Revenue before fixed costs Fixed costs EBIT Interest expense Earnings before taxes Taxes (50%) Net income 13,802,000 (1,285,000) $ 12,517,000 (6,258,500) $ 6,258,500 Print Done