Problem
Sinclair Manufacturing and Boswell Brothers Inc. are both involved in the production of brick for the homebuilding industry. Their financial information is as follows:
Capital Structure
|
|
Sinclair
|
Boswell
|
|
Debt 12%
|
600,000
|
0
|
|
Common stock$10 per show
|
400,000
|
1,000,000
|
|
Total
|
1,000,000
|
1,000,000
|
|
Common Shares
-
|
40,000
|
100,000
|
|
Operating Plans
|
|
|
|
Sales(20,000 units at $20 each)
-
|
1,000,000
|
1,000,000
|
|
Less: Variable costs
|
800,00
|
500,00
|
|
|
($ 16 PER UNIT)
|
($ 10 PER UNIT)
|
|
Fixed costs
|
0 |
300,000
|
|
Earnings before interest and taxes (EBIT)
|
200,000
|
200,000
|
a. If you combine Sinclair’s capital structure with Boswell’s operating plan, what is the degree of combined leverage? (Round to two places to the right of the decimal point.)
b. If you combine Boswell’s capital structure with Sinclair’s operating plan, what is the degree of combined leverage?
c. Explain why you got the results you did in part b.
d. In part b, if sales double, by what percentage will EPS increase?