Question: The current income statement for ABC Inc. is provided below. Sales $5,500,000 Variable Costs 2,000,000 Fixed Costs 500,000 EBIT 3,000,000 Interest ($15,000,000 at 10%) 1,500,000

The current income statement for ABC Inc. is provided below.

Sales	$5,500,000
Variable Costs	2,000,000
Fixed Costs	500,000
EBIT	3,000,000
Interest ($15,000,000 at 10%)	1,500,000
EBT	1,500,000
Tax (at 40%)	600,000
Earnings After Tax (Net Income)	900,000

Calculate the degree of operating leverage.

Calculate the degree of financial leverage.

Calculate the degree of combined leverage.

If sales increase by 10%, by how much would EBIT and EPS change?

Assuming the company has 150,000 shares issued and outstanding. What would the new EPS be as a result of the 10% increase in sales?

Assume that the degree of financial leverage, sales and variable costs are kept unchanged. If ABC wants to lower its degree of combined leverage to 2.1, by how much should SMU reduce its fixed costs to achieve this new degree of combined leverage target?

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