Question

Sinclair Manufacturing and Boswell Brothers Inc. are both involved in the production of brick for the homebuilding industry. Their financial information is as follows:

	Sinclair			Boswell
Capital Structure
Debt @ 11%	$	720,000			0
Common stock, $10 per share		480,000		$	1,200,000
Total	$	1,200,000		$	1,200,000
Common shares		48,000			120,000
Operating Plan:
Sales (52,000 units at $20 each)	$	1,040,000		$	1,040,000
Variable costs		832,000			520,000
Fixed costs		0			302,000
Earnings before interest and taxes (EBIT)	$	208,000		$	218,000

The variable costs for Sinclair are $16 per unit compared to $10 per unit for Boswell.

a. If you combine Sinclair’s capital structure with Boswell’s operating plan, what is the degree of combined leverage? (Round your answer to 2 decimal places.)
  

Degree of combined leverage:

b. If you combine Boswell’s capital structure with Sinclair’s operating plan, what is the degree of combined leverage? (Round your answer to the nearest whole number.)
  

Degree of combined leverage:

c. In part b, if sales double, by what percentage will earnings per share (EPS) increase? (Round your answer to the nearest whole percent.)
  

EPS will increase by %

Answer 1

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