Problem: Winners Inc., a home appliances manufacturer, expects sales of 20,000 units at $5 per unit in the coming year and must meet the following obligations:
Variable operating costs of $2 per unit, fixed operating costs of $10,000, interest of $20,000, and preferred stock dividends of $12,000.
The firm is in the 40% tax bracket and has 5,000 shares of common stock outstanding.
Q1. Calculate the firm's levels of earnings per share associated with the expected sales of 20,000 units and with sales of 30,000 units.
Q2. Calculate the firm's degree of financial leverage (DFL), degree of operating leverage, and use the degree of total leverage (DTL) concept to determine the effect of increase.