Question
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
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 @ 10% | $ | 1,740,000 | 0 | ||
Common stock, $10 per share | 1,160,000 | $ | 2,900,000 | ||
Total | $ | 2,900,000 | $ | 2,900,000 | |
Common shares | 116,000 | 290,000 | |||
Operating Plan: | |||||
Sales (69,000 units at $15 each) | $ | 1,035,000 | $ | 1,035,000 | |
Variable costs | 828,000 | 414,000 | |||
Fixed costs | 0 | 319,000 | |||
Earnings before interest and taxes (EBIT) | $ | 207,000 | $ | 302,000 | |
The variable costs for Sinclair are $12 per unit compared to $6 per unit for Boswell.
a. If you combine Sinclairs capital structure with Boswells operating plan, what is the degree of combined leverage? (Round your answer to 2 decimal places.)
b. If you combine Boswells capital structure with Sinclairs operating plan, what is the degree of combined leverage? (Round your answer to the nearest whole number.)
c. In part b, if sales double, by what percentage will earnings per share (EPS) increase? (Round your answer to the nearest whole percent.)
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started