Compute operating, financial & combined leverage, pre-tax EPS
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Seaside Company manufactures and sells small sailboats. Its annual sales are $3.0 million (30 sailboats at $100,000 each). Because of the need to be near the ocean, the company's fixed costs are high, $1.0 million. The variable cost ratio is 30 percent. The owner, Stan, has financed the business with $1.2 million bank loan at 7 percent and has sold shares of common stock in the business to family members. Currently, there are 10,000 shares outstanding. Seaside 's tax rate is 40 percent.
1.Compute Seaside 's degree of operating leverage.
2.Compute Seaside 's degree of financial leverage.
3.Compute Seaside 's degree of combined leverage.
4.Compute pre-tax earnings per share.
5.Compute pre-tax earnings per share if sales decreased by 10 percent.
6.Compute pre-tax earnings per share if sales increased by 10 percent.
7.Comment on the impact of decreased and increased sales on earnings. What insight can you gain from this analysis?
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Solution Summary
The solution computes operating, financial and combined leverage for pre-tax EPS. The impact of decreased and increased sales on earnings is discussed.
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