Sinclair Manufacturing and Boswell Brothers Inc. are both involved in the produc
ID: 2731337 • Letter: S
Question
Sinclair Manufacturing and Boswell Brothers Inc. are both involved in the production of brick for the homebuilding industry. Their financial information is as follows:
If you combine Sinclair’s capital structure with Boswell’s operating plan, what is the degree of combined leverage? (Round your answer to 2 decimal places.)
If you combine Boswell’s capital structure with Sinclair’s operating plan, what is the degree of combined leverage? (Round your answer to the nearest whole number.)
In part b, if sales double, by what percentage will EPS increase? (Round your answer to the nearest whole percent.)
Sinclair Manufacturing and Boswell Brothers Inc. are both involved in the production of brick for the homebuilding industry. Their financial information is as follows:
Explanation / Answer
a. Combined capital structure after adopting Sinclair's capital structure:
Combined operating plan after adopting Boswell's capital structure:
Degree of operating leverage = Contribution margin / Operating income
= 1846000 / 1204000
= 1.53
Degree of financial leverage = EBIT / EBIT - Interest
= 1204000 / (1204000 - 446400)
= 1.59
Degree of combined leverage = 1.53 x 1.59
= 2.43
b.
a. Combined capital structure after adopting Sinclair's capital structure:
Combined operating plan after adopting Boswell's capital structure:
Degree of operating leverage = Contribution margin / Operating income
= 1846000 / 1204000
= 1.53
Degree of financial leverage = EBIT / EBIT - Interest
= 1204000 / (1204000 - 446400)
= 1.59
Degree of combined leverage = 1.53 x 1.59
= 2.43
b.
a. Combined capital structure after adopting Sinclair's capital structure:
Combined operating plan after adopting Boswell's capital structure:
Degree of operating leverage = Contribution margin / Operating income
= 1846000 / 1204000
= 1.53
Degree of financial leverage = EBIT / EBIT - Interest
= 1204000 / (1204000 - 446400)
= 1.59
Degree of combined leverage = 1.53 x 1.59
= 2.43
b. Combined capital structure after adopting Boswell's capital structure:
Combined operating plan after adopting Boswell's capital structure:
Degree of operating leverage = Contribution margin / Operating income
= 994000 / 994000
= 1.00
Degree of financial leverage = EBIT / EBIT - Interest
= 994000 / (994000 - 0)
= 1.00
Degree of combined leverage = 1.00 x 1.00
= 1.00
c. EPS in part b = 994000 / 620000 = 1.6032
If sales double, EBIT = $1988000
Revised EPS = 1988000 / 620000 = 3.2065
EPS will increase by = (3.2065-1.6032) / 1.6032 x 100
= 100%
Combined $ Debt 12% 3720000 Common stock, $10 per share 2480000 Total 6200000 Common shares 24800