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Glynn Enterprises and Monroe, Inc. both produce fluid contro

Glynn Enterprises and Monroe, Inc. both produce fluid control products. Their financial information is as follows:

Capital Structure
Glynn Monroe

Debt @ 10%................................. $1,500,000 0
Common stock, 10 per share................ 500,000 $2,000,000
__________ __________
$2,000,000 $2,000,000

Common shares..................................50,000 200,000

Operating Plan

Sales (200,000 units at $5 each)............$1,000,000 $1,000,000
Less: Variable costs...................... 600,000 200,000
($3 per unit) ($1 per unit)

Fixed costs....................____________0_ __ 400,000_
Earnings before interest and taxes (EBIT $400,000 $400,000

a. If you combine Glynn's capital structure with Monroe's operating plan, what is the degree of combined leverage?

b. If you combine Monroe's capital structure with Glynn's operating plan, what is the degree of combined leverage?

c. Explain why you got the results you did in Parts A and B.

d. In Part B, if sales double, by what percent will EPS increase?

Solution Preview

Glynn Enterprises and Monroe, Inc., both produce fluid control products. Their financial information is as follows:

Capital Structure

Glynn Monroe
Debt @ 10% $1,500,000 0
Common stock, $10 per share 500,000 $2,000,000
$2,000,000 $2,000,000
Common shares 50,000 200,000

Operating Plan

Sales ...

Solution Summary

The solution provides detailed instructions and explanations for the problem.

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