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% | $ | 1,020,000 |
|
| 0 |
Common stock, $10 per share |
| 680,000 |
| $ | 1,700,000 |
Total | $ | 1,700,000 |
| $ | 1,700,000 |
Common shares |
| 68,000 |
|
| 170,000 |
|
|
|
|
|
|
Operating Plan: |
|
|
|
|
|
Sales (57,000 units at $15 each) | $ | 855,000 |
| $ | 855,000 |
Variable costs |
| 684,000 |
|
| 342,000 |
Fixed costs |
| 0 |
|
| 307,000 |
Earnings before interest and taxes (EBIT) | $ | 171,000 |
| $ | 206,000 |
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.)
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