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:

 

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?

b. If you combine Boswell's capital structure with Sinclair's operating plan, what is the degree of combined leverage?

c. In part b, if sales double, by what percentage will earnings per share (EPS) increase? 

Answer 1

Requirement- Boswell Existing Revised $1,160,000 $2,320,000 [Revised $1,160,000 x 2] Sales Less: Variable Costs Contribution Margin Less: Fixed costs Less: Interest Expense Net Income # of Common shares outstanding Earnings Per Share (EPS) $580,000 -$1,160,000 [Revised $580,000 x 2] $580,000 $1,160,000 -$308,000 -$308,000 [Remains constant] $118,800-$118,800 [$1,080,000 x 11%; As capital structure is interchanged] $153,200 $733,200 180,000 180,000 [$1,800,000 $10] 50.85 S $4.07 [Existing $153,200/180,000 $0.85; Revised $733,200/180,000 $4.07] Therefore, EPS will increase by 378.5996 [($4.07-$0.85) / $0.85-3.7859-378.59%)