The table illustrates that as a result of a 50

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: are (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 per share. The linear nature of the leverage relationship accounts for the fact that The Total Leverage Effect 50% Sales (in units) 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 $ 36,000 Less: Taxes (T Less: Preferred stock dividends 12,000 12,000 Earnings available for common $ 6,000 $ 24,000 Earnings per share (EPS) $6,000 5,000 $1.20 $24,000 5,000 300% aSales revenue $5/unit sales in units. bVariable operating costs $2/unit sales in units. $4.80 DFL 300% 60% 5.0 300% 50% 6.0 CHAPTER 11 Leverage and Capital Structure 433 sales changes of equal magnitude in opposite directions result in EPS...
View Full Document

Ask a homework question - tutors are online