Consider the following information: Sales: $950,000 Interest expense: 40,000 Variable costs: 270,000 Taxes: 84,000 Fixed costs: 400,000 If operating income increases by 5%, what should be the increase in earnings per share? (I) 5

Accounting Dec 08, 2020

Consider the following information:
Sales: $950,000 Interest expense: 40,000 Variable costs: 270,000 Taxes: 84,000 Fixed costs: 400,000
If operating income increases by 5%, what should be the increase in earnings per share?
(I) 5.83% 5.0% (I) 12.14% 0 8.17% (I) 14.17%

Expert Solution

Degree of Financial Leverage = Operating Income / Net Income = 280,000 / 156,000 = 1.7949

If operating income increases by 5 %, increase in earnings per share = 5% * 1.7949 = 8.97%

The answer should be 8.97% which is not given in the options.

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