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% $ 1,080,000 0 Common stock, $10 per share 720,000 $ 1,800,000 Total $ 1,800,000 $ 1,800,000 Common shares 72,000 180,000 Operating Plan: Sales (58,000 units at $20 each) $ 1,160,000 $ 1,160,000 Variable costs 928,000 580,000 Fixed costs 0 308,000 Earnings before interest and taxes (EBIT) $ 232,000 $ 272,000 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.) 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.) c. In part b, if sales double, by what percentage will earnings per share (EPS) increase? (Round your answer to the nearest whole percent.)

Answer 1