Example table 117 we also can assess the combined

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Unformatted text preview: elop the individual concepts of leverage. This combined effect, or total leverage, can be defined as the potential use of fixed costs, both operating and financial, to magnify the effect of changes in sales on the firm’s earnings per share. Total leverage can therefore be viewed as the total impact of the fixed costs in the firm’s operating and financial structure. Cables Inc., a computer cable manufacturer, expects sales of 20,000 units at $5 per unit in the coming year and must meet the following obligations: variable operating costs of $2 per unit, fixed operating costs of $10,000, interest of $20,000, and preferred stock dividends of $12,000. The firm is in the 40% tax bracket and has 5,000 shares of common stock outstanding. Table 11.7 presents 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 sh...
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