Problem 5-20 Combining operating and financial leverage [LO5]

Sinclair Manufacturing and Boswell Brothers Inc. are both involved in the production of brick for the homebuilding industry. Their financial information is as follows:

Capital Structure
	Sinclair			Boswell
Debt @ 11%	$	900,000			0
Common stock, $10 per share		600,000		$	1,500,000
Total	$	1,500,000		$	1,500,000
Common shares		60,000			150,000
Operating Plan
Sales (55,000 units at $20 each)	$	1,100,000		$	1,100,000
Less: Variable costs		880,000			550,000
	($	16 per unit)		($	10 per unit)
Fixed costs		0			305,000
Earnings before interest and taxes (EBIT)	$	220,000		$	245,000

(a)	If you combine Sinclairs capital structure with Boswells operating plan, what is the degree of combined leverage? (Enter only numeric value rounded to 2 decimal places.)

Degree of combined leverage

(b)	If you combine Boswells capital structure with Sinclairs operating plan, what is the degree of combined leverage? (Enter only numeric value.)

Degree of combined leverage

(d)	In part b, if sales double, by what percentage will EPS increase? (Omit the "%" sign in your response.)

EPS will increase by

%