Leverage problems

# Leverage problems - Leverage 1 Suppose you are starting a...

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Leverage 1. Suppose you are starting a new retail store. You would like to have an operating profit margin (EBIT/Sales) of 30%. Your unit contribution margin will be 55% of sales price, and annual sales are expected to be \$15 million. a) To what dollar amount must you limit your fixed costs in order to achieve the 30% operating profit margin? b) If sales increase by 15% above your expectations, by what percentage should operating income increase?

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2. Suppose you decide to borrow money and build an even larger store (so you discard your previous forecasts). With the larger store, you expect to have sales of \$25 million and
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Unformatted text preview: fixed costs of \$7.5 million. Interest payments on the borrowed capital will amount to \$1,500,000. Your store sells one product, which is priced at \$50. Your corporate tax rate is 35%. Your goal is to be able to obtain a net profit margin (net income / sales) of 15.6%. a) What is your firm's contribution margin? b) If your store suffers a 10% decline in operating income, what will be the effect on earnings per share? Why? c) Suppose sales are actually 15% greater than anticipated. What will be the effect on earnings per share? d) What is your break-even point in units?...
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• Spring '10
• Goldwater,Canada,Judd,Byrd,Theniel
• Revenue, Profit margin, Generally Accepted Accounting Principles, Earnings before interest and taxes, retail store

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