The Harding Company manufactures skates. The company's income statement for 2013 is as follows:
Sales (10,500 skates @ $60 each).....................$630,000
Less: Variable costs (10,500 skates at $25)....... 262,500
Fixed costs......................................................200,000
Earnings before interest and taxes (EBIT)............$167,500
Interest expense......................................................62,500
Earnings before taxes (EBT)...................................$105,000
Income tax expense (30%)........................................31,500
Earnings after taxes (EAT).........................................$73,500
Given this income statement, compute the following:
a. degree of operating leverage
b. degree of financial leverage
c. degree of combined leverage
d. break-even point in units (number of skates)
The Harding Company manufactures skates. The company's income statement for 2013 is as follows:
Sales (10,500 skates @ $60 each).....................$630,000
Less: Variable costs (10,500 skates at $25)....... 262,500
Fixed costs......................................................200,000
Earnings before interest and taxes (EBIT)............$167,500
Interest expense......................................................62,500
Earnings before taxes (EBT)...................................$105,000
Income tax expense (30%)........................................31,500
Earnings after taxes (EAT).........................................$73,500
Given this income statement, compute the following:
a. degree of operating leverage
b. degree of financial leverage
c. degree of combined leverage
d. break-even point in units (number of skates)
Related questions
| The Harding Company manufactures skates. The company's income statement for 2010 is as follows: |
| HARDING COMPANY | ||
| Income Statement | ||
| For the Year Ended December 31, 2010 | ||
| Sales (11,200 skates @ $74 each) | $ | 828,800 |
| Less: Variable costs (11,200 skates at $32) | 358,400 | |
| Fixed costs | 270,000 | |
| Earnings before interest and taxes (EBIT) | 200,400 | |
| Interest expense | 66,000 | |
| Earnings before taxes (EBT) | 134,400 | |
| Income tax expense (40%) | 53,760 | |
| Earnings after taxes (EAT) | $ | 80,640 |
| (a) | Compute the degree of operating leverage. (Enter only numeric value rounded to 2 decimal places.) |
| Degree of operating leverage |
| (b) | Compute the degree of financial leverage. (Enter only numeric value rounded to 2 decimal places.) |
| Degree of financial leverage |
| (c) | Compute the degree of combined leverage. (Enter only numeric value rounded to 2 decimal places.) |
| Degree of combined leverage |
| (d) | Compute the break-even point in units (number of skates). (Round your answer to the nearest whole number.) |
| Break-even point | skates |
Additional funds needed
Morrissey Technologies Inc.'s 2012 financial statements are shown here.
| Morrissey Technologies Inc.: Balance Sheet as of December 31, 2012 | ||||
| Cash | $180,000 | Accounts payable | $360,000 | |
| Receivables | 360,000 | Notes payable | 56,000 | |
| Inventories | 720,000 | Accrued liabilities | 180,000 | |
| Total current assets | $1,260,000 | Total current liabilities | $596,000 | |
| Long-term debt | 100,000 | |||
| Fixed assets | 1,440,000 | Common stock | 1,800,000 | |
| Retained earnings | 204,000 | |||
| Total assets | $2,700,000 | Total liabilities and equity | $2,700,000 | |
| Morrissey Technologies Inc.: Income Statement for December 31, 2012 | |||
| Sales | $3,600,000 | ||
| Operating costs including depreciation | 3,279,720 | ||
| EBIT | $320,280 | ||
| Interest | 20,280 | ||
| EBT | $300,000 | ||
| Taxes (40%) | 120,000 | ||
| Net Income | $180,000 | ||
| Per Share Data: | |||
| Common stock price | $45.00 | ||
| Earnings per share (EPS) | $1.80 | ||
| Dividends per share (DPS) | $1.08 | ||
Suppose that in 2013, sales increase by 15% over 2012 sales. The firm currently has 100,000 shares outstanding. It expects to maintain its 2012 dividend payout ratio and believes that its assets should grow at the same rate as sales. The firm has no excess capacity. However, the firm would like to reduce its Operating costs/Sales ratio to 89.5% and increase its total debt-to-assets ratio to 30%. (It believes that its current debt ratio is too low relative to the industry average.) The firm will raise 30% of 2013 forecasted total debt as notes payable, and it will issue long-term bonds for the remainder. The firm forecasts that its before-tax cost of debt (which includes both short-term and long-term debt) is 12%. Assume that any common stock issuances or repurchases can be made at the firm's current stock price of $45.
- Construct the forecasted financial statements assuming that these changes are made. What are the firm's forecasted notes payable and long-term debt balances? What is the forecasted addition to retained earnings? Round your answers to the nearest cent.
Morrissey Technologies Inc. Pro Forma Income Statement December 31, 2013 2012 2013 Pro Forma Sales $3,600,000 $ Operating costs (includes depreciation) 3,279,720 $ EBIT $320,280 $ Interest expense 20,280 $ EBT $300,000 $ Taxes (40%) 120,000 $ Net Income $180,000 $ Dividends $ $ Addition to RE $ $ Morrissey Technologies Inc. Pro Forma Balance Statement December 31, 2013 2012 2013 Pro Forma Cash $180,000 $ Accounts receivable 360,000 $ Inventories 720,000 $ Fixed assets 1,440,000 $ Total assets $2,700,000 $ Payables + accruals $540,000 $ Short-term bank loans 56,000 $ Total current liabilities $596,000 $ Long-term bonds 100,000 $ Total debt $696,000 $ Common stock 1,800,000 $ Retained earnings 204,000 $ Total common equity $2,004,000 $ Total liab. and equity $2,700,000 $ - If the profit margin remains at 5% and the dividend payout ratio remains at 60%, at what growth rate in sales will the additional financing requirements be exactly zero? In otherwords, what is the firm's sustainable growth rate? (Hint: Set AFN equal to zero and solve for g.) Round your answer to two decimal places.
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