Question
The current income statement for Halifax Tire Inc. is provided below. Sales $8,000,000 Variable Costs 2,500,000 Fixed Costs 3,000,000 Depreciation 400,000 EBIT 2,100,000 Interest ($10,000,000
The current income statement for Halifax Tire Inc. is provided below.
| Sales | $8,000,000 |
| Variable Costs | 2,500,000 |
| Fixed Costs | 3,000,000 |
| Depreciation | 400,000 |
| EBIT | 2,100,000 |
| Interest ($10,000,000 at 9%) | 900,000 |
| EBT | 1,200,000 |
| Tax (at 40%) | 480,000 |
| Earnings After Tax (Net Income) | 720,000 |
- Calculate the degree of operating leverage.
- Calculate the degree of financial leverage.
- Calculate the degree of combined leverage.
- What percentage change in EBIT would result from a 10% decrease in sales? What percentage change in EPS would result from a 10% decrease in sales?
- Assuming the company has 200,000 shares issued and outstanding. What would the new EPS if sales decreased by 10%?
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Contemporary Financial Management
Authors: James R Mcguigan, R Charles Moyer, William J Kretlow
10th Edition
978-0324289114, 0324289111
