(leverage and EPS) You have developed the following pro forma income statement for your corporation:
Sales $ 45,805,000
Variable cost (22,712,000)
Revenue before fixed costs $ 23,093,000
Fixed costs (9,293,000)
EBIT $13,800,000
Interest expense (1,375,000)
Earnings before taxes $12,425,000
Taxes (50%) (6,212,500)
Net Income $6,212,500
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:
a. If sales should increase by 25 percent, by what percent would earnings before interest and taxes and net income increase
b. If sales decrease by 25 percent, by what percent would earnings before interest and taxes and net income decrease?
c. 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 parts a and b?
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a. If sales should increase by 25 percent, the percent change in earnings before interest and taxes is ____% (round to two decimal places)
If sales should increase by 25% the percentage change in net income is ___% (round to two decimal places)
b. If sales should decrease by 25 percent, the percent change in earnings before interest and taxes is ____% (round to two decimal places)
If sales should decrease by 25% the percentage change in net income is ___% (round to two decimal places)
c. If sales should increase by 25% and interest expense should decrease by 50%, the percentage change in earnings before interest and taxes is ___% (round to two decimal places)
If sales should increase by 25% and interest expense should decrease by 50%, the percentage change net income is ___% (round to two decimal places)
If sales should decrease by 25% and interest expense should decrease by 50%, the percentage change in earnings before interest and taxes is ___% (round to two decimal places)
If sales should decrease by 25% and interest expense should decrease by 50%, the percentage change in net income is ___% (round to two decimal places.)