Purchase Solution

Leverage and Capital Structure

Not what you're looking for?

Ask Custom Question

(See attached file for full problem description and complete chart).

---
Johnson Manufacturing and Aaron Brothers Inc. are both involved in the production of brick for the homebuilding industry. Their financial information is as follows:

Johnson Aaron
Capital Structure
Debt @ 12% $ 600,000 -
Common stock, $10 per share 400,000 1,000,000
Total 1,000,000 1,000,000
Common shares 40,000 100,000

Operating Plan 1,000,000 1,000,000
Sales (50,000 units at $20 each) 800,000 500,000
Less: Variable costs ($16 per unit) ($10 per unit)
Fixed costs 300,000
Earnings before interest and taxes (EBIT) $ 200,000 200,000

a. If you combine Johnson's capital structure with Aaron's operating plan, what is the degree of
combined leverage?
b. If you combine Aaron's capital structure with Johnson's operating plan, what is the degree of
combined leverage?
c. In part b, if sales double, by what percent will EPS increase?

Attachments
Purchase this Solution
Solution Summary

The solution explains the impact of capital structure on operating leverage and combined leverage.

Purchase this Solution
Free BrainMass Quizzes
Economics, Basic Concepts, Demand-Supply-Equilibrium

The quiz tests the basic concepts of demand, supply, and equilibrium in a free market.

Basics of Economics

Quiz will help you to review some basics of microeconomics and macroeconomics which are often not understood.

Economic Issues and Concepts

This quiz provides a review of the basic microeconomic concepts. Students can test their understanding of major economic issues.

Pricing Strategies

Discussion about various pricing techniques of profit-seeking firms.

Elementary Microeconomics

This quiz reviews the basic concept of supply and demand analysis.

View More Free Quizzes
Related BrainMass Solutions

  • Leverage and Optimal Capital Structure

    275760 No Leverage, Inc., and High Leverage, Inc: Determine Optimal Capital Structure Two firms, No Leverage, Inc., and High Leverage, Inc, have equal levels of operating risk and differ only in their capital structure.

  • Capital structure

    A) leverage ratios and coverage ratios B) Coverage ratios and profitability ratios C) Coverage ratios and liquidity ratios D) Balance sheet leverage ratios and profitability ratios Answer: A) Leverage ratios and coverage ratios Capital structure

  • Capital structure

    what ratios assess the degree of financial leverage in a firm's capital structure? The term capital structure is used to represent the proportionate relationship between debt and shares .

  • Capital Structure Performance Analysis

    274291 Capital Structure Performance Analysis 3. Two firms, No Leverage, Inc., and High Leverage, Inc., have equal levels of operating risk and differ only in their capital structure.

  • Glynn Enterprises and Monroe, Inc. both produce fluid contro

    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.

  • Finance: Project cost of capital with leverage.

    The appropriate cost would have to include the extent of debt amount and cost that is different from the firm's capital structure.

  • Valuation and Leverage and Estimating Value

    structure, then the costs of the different components of its capital structure including long term debt, preferred shares and common equity.

  • Trade Off Theory

    473497 Capital Structure: Trade Off Theory "Optimal leverage refers to the amount of debt in a firm's capital structure, which minimizes the firm's cost of capital and thus maximizes its market value".

  • Operating vs. Financial Leverage

    Financial Leverage and Capital Structure Policy. In Fundamentals of corporate finance (8th ed., pp. 234-263). New York, New York: McGraw-Hill Irwin.

View More Related Solutions