A company has asked you to review aspects of its financial condition, specifical

Question

A company has asked you to review aspects of its financial condition, specifically its break even point and its use of leverage.
Management has supplied you with the following company information, along with corresponding data for the industry.
Hatfield Industry

Price per Unit $375.00 $525.00
Unit Sales (Memberships) 500,000 450,000
Interest expense $3,000,000 $2,000,000
Variable Costs (% Sales) 50.00% 58.00%
Fixed Costs $50,000,000 $55,000,000
Common Shares 8,000,000 7,000,000

Taxes 36.00% 36.00%





Use the following headings for your comparison:


Hatfield Industry

Sales
Less: Variable Costs
Less: Fixed Costs
EBIT
Less: Interest Expense
Earnings before Taxes
Taxes
Net Income

Earnings per Share

Break-even Point (Units)
Break-even Point ($)

Degree of Operating Leverage
Degree of Financial Leverage
Degree of Combined Leverage

Are there any significant financial changes you would suggest to management as a result of this analysis?

Explanation / Answer

Break even point units

Harfield

Assuming x to be the break even point

375*x = 187.5*x + 3000000 + 50000000

Solving for x = 282666 units answer

In value = 282666*375 = 106000000

Industry

Assuming x to be the break even point

525*x = 262.5*x + 2000000 + 55000000

Solving for x = 217142 units answer

In value = 217142*525 = 114000000 answer

Happy to help

Hatfield Industry Sales 187500000 236250000 Variable costs 93750000 137025000 Fixed costs 50000000 55000000 EBIT 43750000 44225000 Interest 3000000 2000000 EBT 40750000 42225000 TAX 14670000 15201000 Net income 26080000 27024000 Common shares 8000000 7000000 EPS 3.26 3.8605714

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