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Chapter 2: 11BP_c (page 147)

The Harding Company manufactures skates. The company’s income statement for 20X1 is as follows:

HARDING COMPANY

Income Statement

For the year ended December 31, 20X1

Sales (10,500 skates at \(60 each)

\)630,000

Less: variable costs (10,500 tires at \(25)

262,500

Less: fixed cost

200,000

Earnings before interest and taxes (EBIT)

\)167,500

Interest expenses

62,500

Earning before taxes (EBT)

\(105,000

Income tax expenses (30%)

31,500

Earning after taxe (EAT)

\)73,500

Given this income statement, compute the following:

c. Degree of combined leverage.

Short Answer

Expert verified

The degree of combined leverage is 3.5.

Step by step solution

01

Interest expenses

Interest expense means the finance cost charged on the company’s borrowing. It is treated as an indirect expense in the income statement of the company.

02

Degree of combined leverage

Degreeofcombinedleverage=ContributionEBT=$630,000-$262,500$105,000=3.5

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Most popular questions from this chapter

A-Rod Fishing Supplies had sales of \(2,500,000 and cost of goods sold of \)1,710,000. Selling and administrative expenses represented 10 percent of sales. Depreciation was 6 percent of the total assets of $4,680,000. What was the firm’s operating profit?

Amigo Software Inc. has total assets of \(889,000, current liabilities of\)192,000, and long-term liabilities of \(154,000. There is \)87,000 in preferredstock outstanding. Thirty thousand shares of common stock have been issued.

a. Compute book value (net worth) per share.

b. If there is $56,300 in earnings available to common stockholders and the

firm’s stock has a P/E of 23 times earnings per share, what is the currentprice of the stock?

c. What is the ratio of market value per share to book value per share? (Round

to two places to the right of the decimal point.)

Dr. Zhivàgo Diagnostics Corp.’s income statement for 20X1 is as follows

Sales\( 2790000
Cost of goods sold1790000
Gross profits\) 1000000
Selling and administrative expenses302000
Operating profits\( 698000
Interest Expense54800
Income before tax\) 643200
Taxes 30%192960
Income after tax$ 450240

b. Assume that in 20X2, sales increase by 10 percent and cost of goods sold increases by 20 percent. The firm is able to keep all other expenses the same. Assume a tax rate of 30 percent on income before taxes. What is income after taxes and the profit margin for 20X2?

Perez Corporation has the following financial data for the years 20X1 and 20X2:

20X1

20X2

Sales

\(8,000,000

\)10,000,000

Cost of goods sold

6,000,000

9,000,000

Inventory

800,000

1,000,000

a. Compute inventory turnover based on Ratio 6, Sales/Inventory, for each year.

What is free cash flow? Why is it important to leveraged buyouts?
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