The Hurricane Lamp Company forecasts that next year’s sales will be $6 million. Fixed operating costs are estimated to be $800,000, and the variable cost ratio (that is, variable costs as a fraction of sales) is estimated to be 0.75. The firm has a $600,000 loan at 12 percent interest. It has 20,000 shares of $2.5 preferred stock and 40,000 shares of common stock outstanding. Hurricane Lamp is in the 40 percent corporate income tax bracket.
Forecast Hurricane Lamp’s earnings per share (EPS) for next year. Develop a complete income statement using the revised format illustrated in Table 14.1. Then determine what Hurricane Lamp’s EPS would be if sales were 12 percent above the projected $6 million level. Round your answers to the nearest cent.EPS1: $EPS2: $
Calculate Hurricane Lamp’s degree of operating leverage (DOL) at a sales level of $6 million using the following formulas.
The definitional formula (Equation 14.1). Round your answer to three decimal places.
The simpler, computational formula (Equation 14.2). Round your answer to three decimal places.
What is the economic interpretation of this value? Round the monetary value to the nearest dollar and the percentage value to three decimal places. Enter your answer for the monetary value in whole dollars. For example, an answer of $1.20 million should be entered as 1,200,000, not 1.20.
From a base level of $ , each one percent change in results in a percent change in , in the direction as the change.
Calculate Hurricane Lamp’s degree of financial leverage (DFL) at the EBIT level corresponding to sales of $6 million using the following formulas.
The definitional formula (Equation 14.3). Round your answer to three decimal places.
The simpler, computational formula (Equation 14.4). Round your answer to three decimal places.
Calculate Hurricane Lamp’s degree of combined leverage (DCL) using the following formulas.
The definitional formula (Equation 14.5). Round your answer to three decimal places.
The simpler, computational formula (Equation 14.7). Round your answer to three decimal places.
The degree of operating and financial leverage calculated in parts b and c. Round your answer to three decimal places.
From a base level of $ , each one percent change in results in a percent change in , in the direction as the change
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