Problem:
(Leverage and EPS) You have developed the following pro forma income statement for your corporation: Sales $45832000 Variable costs (22756000) Revenue before fixed costs $23076000 Fixed costs (9105000) EBIT $13971000 Interest expense (1317000) Earnings before taxes $12654000 Taxes(50%) (6327000) Net income $6327000 It represents the most recent year's operations, which ended yesterday. Your supervisor in the controller's office has just handed you a memorandum asking for written responses to the following questions:
Task:
Question 1: If sales should increase by 30 percent, y what percent would earnings before interest and taxes and net income increase?
Question 2: If sales should decrease by 30 percent, by what percent would earnings before interest and taxes and net income decrease?
Question 3: If the firm were to reduce its reliance on debt financing such that interest expense were cut in half, how would this affect your answers to part a and b?
Please provide step by step solution and show all work.