Below is Income Statement information for Karlsson’s Carpets
Revenue: $3,107,262
Variable costs: 30% of revenue
Fixed costs: $1,000,000
Depreciation: $475,000
Bond Issue A: $300,000 face value, 10% coupon
Bond Issue B: $500,000 face value, 8% coupon
Bond Issue C: $900,000 face value, 12% coupon
Tax rate: 40%
Common shares issued and Outstanding: 250,000
a. Calculate the degree of operating leverage for the firm.
b. Calculate the degree of financial leverage for the firm.
c. Calculate the degree of combined leverage for the firm.
d. If the company is able to increase their sales by 15%, what percentage increase in EPS would you expect to observe? (2 marks)
e. If the sales increase by 15%, what will the new EPS be?