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The current income statement for Halifax Tire Inc. is provided below.
Sales $8,000,000
Variable Costs 2,500,000
Fixed Costs 3,000,000
Depreciation 400,000
EBIT 2,100,000
Interest ($10,000,000 at 9%) 900,000
EBT 1,200,000
Tax (at 40%) 480,000
Earnings After Tax (Net Income) 720,000
a) Calculate the degree of operating leverage.
b) Calculate the degree of financial leverage.
c) Calculate the degree of combined leverage.
d) What percentage change in EBIT would result from a 10% decrease in sales? What percentage change in EPS would result from a 10% decrease in sales?
e) Assuming the company has 200,000 shares issued and outstanding. What would the new EPS be if sales decreased by 10%?
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