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 @ 12%	$	1,320,000			0
Common stock, $10 per share		880,000		$	2,200,000
Total	$	2,200,000		$	2,200,000
Common shares		88,000			220,000
Operating Plan:
Sales (62,000 units at $25 each)	$	1,550,000		$	1,550,000
Variable costs		1,116,000			744,000
Fixed costs		0			312,000
Earnings before interest and taxes (EBIT)	$	434,000		$	494,000

The variable costs for Sinclair are $18 per unit compared to $12 per unit for Boswell.

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

Answer 1