In: Accounting
1-) Papers co. generates €10,000,000 in sales. Its
variable costs equal 85.00% of sales and its fixed costs are
€500,000. Therefore, the company's operating income (EBIT) equals
€1,000,000. The company estimates that if its sales were to
increase 9.5%, its net income would increase 17.50%.
Income tax rate is 35%.
What is the company's interest expense? Build the
Income statement, do not round intermediate calculations and
present them all.
1.2-) Assume that a firm currently has EBIT of
€2,000,000, a degree of total leverage of 6.000, and a degree of
financial leverage of 1.875. If sales decline by 20% next year,
then what will be the firm's expected EBIT in one year? Do not
round intermediate calculations.
1.3-) Given the following information, answer the following questions.
Total Revenue = €3Q
Total Costs = €1,500 + €2Q
a) What is the break-even level of output?
(0,5v)
b) If the firm sells 1,300 units, what are its earnings or losses?
(0,5v)
c) If sales rise to 2,000 units, what are the firm's earnings or
losses? (0,5v)
d) If the total cost equation were TC = €2,000 + €1.80Q what
happens to the break-even level of output units?
(1): For both the scenarios we assume the interest expense to be “x”. Thus Net income in base case = (1,000,000-x)*(1-0.35) = 650,000 – 0.65x
Scenario in which sales = 9.5% higher i.e. 10,950,000. Here EBIT = 1,142,500. Thus net income = (1,142,500-x)*(1-0.35) = 742,625 – 0.65x
Now 1.175*(650,000 – 0.65x) = 742,625 – 0.65x
Or 763,750 – 0.76375x = 742,625 – 0.65x
Or 0.11375x = 21,125
Or x = 185,714.29 (rounded to 2 decimal place)
Income statement of the base case:
Sales | 10,000,000.00 |
less: fixed costs | 500,000.00 |
less:Variable costs (85% of sales) | 8,500,000.00 |
EBIT | 1,000,000.00 |
Less: Interest expenses | 185,714.29 |
PBT | 814,285.71 |
Less: tax @ 35% of PBT | 285,000.00 |
Net Income | 529,285.71 |
Income statement in case when the sales increases:
Sales (10 million * 1.095) | 10,950,000.00 |
less: fixed costs | 500,000.00 |
less:Variable costs (85% of sales) | 9,307,500.00 |
EBIT | 1,142,500.00 |
Less: Interest expenses | 185,714.29 |
PBT | 956,785.71 |
Less: tax @ 35% of PBT | 334,875.00 |
Net Income | 621,910.71 |
1.2: DOL = DTL/DFL = 6/1.875 = 3.20
Using the data we can now determine the change in EBIT. EBIT = % sales * DOL * EBIT
= -20% * 3.20 * 2,000,000
= -1,280,000
Thus EBIT in 1 year = 2,000,000 – 1,280,000
= 720,000
1.3: (a): At break even 3q = 1500+2q
Or q = 1500. Thus break even = 1500 units
(b): Revenue = 3*1300 = 3900. Costs = 1500+(2*1300) = 4100. Thus loss = 3900-4100 = 200 loss
(c ): Revenue = 2000*3 = 6000. Costs = 1500+(2*2000) = 5500. Thus earnings = 6000-5500 = 500 earnings
(d): Here break even will be: 3q = 2000 + 1.8q
Or q = 2000/1.2 = 1,666.67 units. Thus breakeven will rise by 166.67 units from the earlier 1500 units to 1666.67 units now.