(Leverage and EPS)You have developed the following pro forma income statement fo
ID: 2743187 • Letter: #
Question
(Leverage and EPS)You have developed the following pro forma income statement for your corporation: LOADING... . 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 2020 percent, by what percent would earnings before interest and taxes and net income increase? b.If sales should decrease by 2020 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? Please show work
Sales 45,682,000.00 Variable Costs -22,806,000.00 Revenue Before Fixed Costs 22,876,000.00 Fixed Costs -9,124,000.00 EBIT 13.752,000.00 Interest Expense -1,259,000.00 Earning before Taxes 12,493,000.00 Taxes (50%) -6,246,500.00 Net income 6,246,500.00Explanation / Answer
Amount in $ A and B Particulars Present Sales Qty Increased by 20% Sales Qty decreased by 20% In % Sales 4,56,82,000 100 5,48,18,400 3,65,45,600 Variable Costs -2,28,06,000 -0.50 -2,73,67,200 -1,82,44,800 Revenue Before Fixed Costs 2,28,76,000 0.50 2,74,51,200 1,83,00,800 Fixed Costs -91,24,000 -91,24,000 -91,24,000 EBIT 1,37,52,000 1,83,27,200 91,76,800 Interest Expense -12,59,000 -12,59,000 -12,59,000 Earning before Taxes 1,24,93,000 1,70,68,200 79,17,800 Taxes (50%) -62,46,500 -85,34,100 -39,58,900 Net income 62,46,500 85,34,100 39,58,900 Change in EBIT 45,75,200 -45,75,200 Present EBIT 1,37,52,000 1,37,52,000 Change in EBIT % 33.27% -33.27% Change in Net Income 22,87,600 -22,87,600 Present Net Income 62,46,500 62,46,500 Change in Net Income % 36.62% -36.62% C Amount in $ Particulars Present Sales Qty Increased by 20% Sales Qty decreased by 20% In % Sales 4,56,82,000 100 5,48,18,400 3,65,45,600 Variable Costs -2,28,06,000 -0.50 -2,73,67,200 -1,82,44,800 Revenue Before Fixed Costs 2,28,76,000 0.50 2,74,51,200 1,83,00,800 Fixed Costs -91,24,000 -91,24,000 -91,24,000 EBIT 1,37,52,000 1,83,27,200 91,76,800 Interest Expense -12,59,000 -6,29,500 -6,29,500 Earning before Taxes 1,24,93,000 1,76,97,700 85,47,300 Taxes (50%) -62,46,500 -88,48,850 -42,73,650 Net income 62,46,500 88,48,850 42,73,650 Change in EBIT 45,75,200 -45,75,200 Present EBIT 1,37,52,000 1,37,52,000 Change in EBIT % 33.27% -33.27% Change in Net Income 26,02,350 -19,72,850 Present Net Income 62,46,500 62,46,500 Change in Net Income % 41.66% -31.58%
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