Question

You have developed the following pro forma income statement for your corporation. It represents the most recent year’s operations, which ended yesterday.
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
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?



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  • CreatedOctober 31, 2014
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