Question
The finance manager of Canadian Inc. (CI) has provided the following excerpts on CIs financial position for three years: Year 2019 2020 2021 (projected) Sales
The finance manager of Canadian Inc. (CI) has provided the following excerpts on CIs financial position for three years:
| Year | 2019 | 2020 | 2021 (projected) |
| Sales | $3,500,000 | $5,000,000 | $5,000,000 |
| Variable cost | $1,400,000 | $2,000,000 | $2,000,000 |
| Fixed cost | $1,000,000 | $1,000,000 | $1,000,000 |
| Equity ($50/share) | $2,500,000 | $2,500,000 | $5,000,000 |
| Debt (8%) | $ 500,000 | $3,000,000 | $ 500,000 |
| Tax rate | 20% | 20% | 20% |
During 2020, CI issued debt of $2,500,000. Near the end of 2020, CIs management decided to issue equity of $2,500,000 and use the proceeds to retire the debt. The debt was issued on January 1, 2020, and was retired on January 1, 2021.
Required:
- Determine CIs net income for 2019 and 2020 and its projected net income for 2021. (3 marks)
- For each of 2019, 2020, and 2021, calculate the following ratios:
- degree of operating leverage (1.5 marks)
- degree of financial leverage (1.5 marks)
- degree of total leverage (1.5 marks)
- Comment on any trends that you observe in the leverage measures. (2.5 marks)
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The 3 Signal The Investing Technique That Will Change Your Life
Authors: Jason Kelly
1st Edition
0142180955, 978-0142180952
