(Leverage and EPS) You have developed the following proforma income statement for your corporation: Sales $45832000 Variable costs (22756000) Revenue before fixed costs $23076000 Fixed costs (9105000) EBIT $13971000 Interest expense (1317000) Earnings before taxes $12654000 Taxes (50%) (6327000) Net income $6327000 It represents the most recent year’s operations, which ended yesterday. Your supervisor in the controller’s office has just handed you a memorandum asking for written responses to the following questions:
a. If sales should increase by 30 percent, y what percent would earnings before interest and taxes and net income increase?
b. If sales should decrease by 30 percent, by what percent would earnings before interest and taxes and net income decrease?
c. If the firm were to reduce its reliance on debt financing such that interest expense were cut in half, how would this affect your answers to part a and b?