Question

You have developed the following pro forma income statement for your​ corporation:   LOADING.... It represents the most recent​ year's operations, which ended yesterday. Your supervisor in the​ controller's office has just handed you a memorandum asking for written responses to the following​ questions:

a.  If sales should increase by 25 ​percent, by what percent would earnings before interest and taxes and net income​ increase?

b.  If sales should decrease by 25 ​percent, by what percent would earnings before interest and taxes and net income​ decrease?

c.  If the firm were to reduce its reliance on debt financing such that interest expense were cut in​ half, how would this affect your answers to parts a and b​?

Sales	$	45,750,000
Variable costs		(22,800,000)
Revenue before fixed costs	$	22,950,000
Fixed costs		(9,200,000)
EBIT	$	13,750,000
Interest expense		(1,350,000)
Earnings before taxes	$	12,400,000
Taxes (50%)		(6,200,000)
Net income	$	6,200,000

Answer 1