7 leverage and capital structure 519 the total

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Unformatted text preview: ts) 20,000 30,000 Sales revenuea $100,000 $150,000 Less: Variable operating costsb 40,000 60,000 Less: Fixed operating costs 10,000 10,000 $ 50,000 $ 80,000 Earnings before interest and taxes (EBIT) DOL 60% 50% 1.2 60% DTL 20,000 Less: Interest Net profits before taxes 20,000 $ 30,000 $ 60,000 0.40) 12,000 24,000 Net profits after taxes $ 18,000 300% 50% 6.0 $ 36,000 Less: Taxes (T Less: Preferred stock dividends 12,000 $ 6,000 300% 60% 5.0 12,000 Earnings available for common DFL $ 24,000 Earnings per share (EPS) $6,000 5,000 $1.20 $24,000 5,000 $4.80 300% aSales revenue $5/unit sales in units. operating costs $2/unit sales in units. bVariable the levels of earnings per share associated with the expected sales of 20,000 units and with sales of 30,000 units. The table illustrates that as a result of a 50% increase in sales (from 20,000 to 30,000 units), the firm would experience a 300% increase in earnings per share (from $1.20 to $4.80). Although it is not shown in the table, a 50% decrease in sales would, conversely, result in a 300% decrease in earnings...
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This document was uploaded on 01/19/2014.

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