Sinclair Manufacturing and Boswell Brothers Inc. are both involved in the production of brick for the homebuilding industry. Their financial information is as follows:
|
|
Sinclair
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Boswell
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|
Capital Structure
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|
|
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Debt @ 11%
|
1,440,000
|
0
|
|
Common stock, $10 per share
|
960,000
|
2,400,000
|
|
Total
|
2,400,000
|
2,400,000
|
|
Common shares
|
96,000
|
240,000
|
|
Operating Plan:
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|
|
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Sales (64,000 units at $20 each)
|
1,280,000
|
1,280,000
|
|
Variable costs
|
1,024,000
|
640,000
|
|
Fixed costs
|
0
|
314,000
|
|
Earnings before interest and taxes (EBIT)
|
256,000
|
326,000
|
The variable costs for Sinclair are $16 per unit compared to $10 per unit for Boswell.
a. If you combine Sinclair's capital structure with Boswell's operating plan, what is the degree of combined leverage?
b. If you combine Boswell's capital structure with Sinclair's operating plan, what is the degree of combined leverage?
c. In part b, if sales double, by what percentage will EPS increase?