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Homework answers / question archive / Below is Income Statement information for Claire's Cabinets Limited Revenue: $3,107,262 Variable costs: 30% of revenue Fixed costs: $1,000,000 Depreciation: $475,000 Bond Issue A: $300,000 face value, 10% coupon Bond Issue B: $500,000 face value, 8% coupon Bond Issue C: $900,000 face value, 12% coupon Tax rate: 40% Common shares issued and Outstanding: 250,000 Calculate the degree of operating leverage for the firm
Below is Income Statement information for Claire's Cabinets Limited Revenue: $3,107,262
Variable costs: 30% of revenue
Fixed costs: $1,000,000
Depreciation: $475,000
Bond Issue A: $300,000 face value, 10% coupon Bond Issue B: $500,000 face value, 8% coupon Bond Issue C: $900,000 face value, 12% coupon Tax rate: 40%
Common shares issued and Outstanding: 250,000
1) Computation of Degree of Operating Leverage:
Degree of Operating Leverage = Contribution Margin / Earnings before Interest and Tax
= 2175083.40/700083.40
Degree of Operating Leverage = 3.11 times
2) Computation of Degree of Financial Leverage:
Degree of Financial Leverage = Earnings before Interest and Tax /Earnings before Tax
= 700083.40/522,083.40
Degree of Financial Leverage = 1.34 times
3) Computation of Degree of Combined Leverage:
Degree of Combined Leverage = Degree of Operating Leverage*Degree of Financial Leverage
= 3.11*1.34
Degree of Combined Leverage = 4.17 times
4) Computation of Percentage increase in EPS:
Percentage increase in EPS = Degree of Combined Leverage * Percentage increase in sales
= 4.17*15%
Percentage increase in EPS = 62.5%
5) Computation of New EPS:
New EPS = $1.25*(1+62.5%) = $2.04
6) Computation of New EPS if company's sales decrease by 12%:
Percentage decrease in EPS = Degree of Combined Leverage * Percentage decrease in sales
= 4.17*12%
Percentage increase in EPS = 50.0%
New EPS = $1.25*(1-50.0%) = $0.63
7) Computation of New EPS If EBIT increases by 5%:
Degree of Financial Leverage = % change in EPS / % change in EBIT
1.34 = % change in EPS / 5%
% change in EPS = 1.34*5% = 6.70%
New EPS = $1.25*(1+6.70%) = $1.34 per share
8) Computation of New EBIT If the company's sales decrease by 7%:
Degree of Operating Leverage = % change in EBIT/% change in Sales
3.11 = % change in EBIT/7%
% change in EBIT = 3.11*7%
% change in EBIT = 21.75%
New EBIT = $700,083.40*(1-21.75%) = $547,815.26
