Problem: Johnson Manufacturing and Aaron Brothers Inc. are both involved in the production of brick for the homebuilding industry. Their financial information is as follows:
| |
|
|
|
|
Johnson |
Aaron |
| Capital Structure |
|
|
|
|
|
| Debt @ 12% |
|
|
$ |
600,000 |
- |
| Common stock, $10 per share |
|
|
400,000 |
1,000,000 |
| Total |
|
|
|
|
1,000,000 |
1,000,000 |
| Common shares |
|
|
|
40,000 |
100,000 |
|
|
|
|
|
|
|
| Operating Plan |
|
|
|
1,000,000 |
1,000,000 |
| Sales (50,000 units at $20 each) |
|
800,000 |
500,000 |
| Less: Variable costs |
|
|
($16 per unit) |
($10 per unit) |
| Fixed costs |
|
|
|
|
300,000 |
| Earnings before interest and taxes (EBIT) |
$ |
200,000 |
200,000 |
Question 1. If you combine Johnson's capital structure with Aaron's operating plan, what is the degree of combined leverage?
Question 2. If you combine Aaron's capital structure with Johnson's operating plan, what is the degree of combined leverage?
Question 3. In part 2, if sales double, by what percent will EPS increase?