20BP_a Sinclair Manufacturing and Boswe... [FREE SOLUTION]

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Foundations Of Financial Management

Stanley B. Block, Geoffrey A. Hirt, Bartley Danielsen

Business Studies

16th Edition 路 768 pages

ISBN: 9781259277160

Chapter 2: 20BP_a (page 150)

Sinclair Manufacturing and Boswell Brothers Inc. are both involved in the production of brick for the homebuilding industry. Their financial information is as follows:
Capital Structure
Sinclair
Boswell
Deb @11%
$900,000
0
Common stock, $10 per share
600,000
$1,500,000
Total
$1,500,000
$1,500,000
Common shares
60,000
150,000
Operating plans
Sales (55,000 units at $20 each)
$1,100,000
$1,100,000
Less: variable cost
880,000
($16 per unit)
550,000
($10 per unit)
Fixed cost
0
305,000
Earnings before interest and taxes (EBIT)
$220,000
$245,000
a. If you combine Sinclair鈥檚 capital structure with Boswell鈥檚 operating plan, what is the degree of combined leverage? (Round to two places to the right of the decimal point.)

Short Answer

Expert verified

The Degree of combined leverage of both the companies is 3.77

Step by step solution

Contribution

$\begin{array}{rcl} Contribution & = & Quantity 脳 (Sales price per unit - Variable cost per unit of boswell) \\ = & 55, 000 脳 ($ 20 - $ 10) \\ = & $ 550, 000 \end{array}$

EBT

$\begin{array}{rcl} EBT & = & Contribution - Fixed cost of boswell - Interest of Sinclair \\ = & $ 550, 000 - $ 305, 000 - ($ 900, 000 脳 11 %) \\ = & $ 146, 000 \end{array}$

Degree of combined leverage of both companies

$\begin{array}{rcl} Degree of combined leverage & = & \frac{Contribution}{EBT} \\ = & \frac{$ 550, 000}{$ 146, 000} \\ = & 3.77 \end{array}$

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Current assets		Liabilities
Cash	\(15,000	Accounts payable	\)17,000
Accounts receivable	20,000	Notes payable	25,000
Inventory	30,000	Bonds payable	55,000
Prepaid expenses	12,500

Fixed assets		Stockholder鈥檚 equity
Plant and equipment (gross) Less: accumulated depreciation	\(255,000 51,000	Preferred stock	\)25,000
Net plant and equipment	\(204,000	Common stock	60,000
		Paid in capital	30,000
		Retained earnings	69,500
Total assets	\)281,500	Total liabilities and stockholder鈥檚 equity	\(281,500

Accumulated depreciation	\(309,000
Retained earnings	187,000
Cash	14,000
Bonds payable	136,000
Accounts receivable	54,000
Plant and equipment 鈥� original cost	775,000
Accounts payable	35,000
Allowance for bad debts	9,000
Common stock, \)1 par, 100,000 share outstanding	100,000
Inventory	70,000
Preferred stock, $59 par, 1,000 share outstanding	59,000
Marketable securities	24,000
Investments	20,000
Notes payable	34,000
Capital paid in excess of par (common stock)	88,000

JONES CORPORATION
Current assets		Liabilities
Cash	\(20,000	Accounts payable	\)100,000
Accounts receivable	80,000	Bonds payable (long term)	80,000
Inventory	50,000
Long Term Assets		Stockholder鈥檚 Equity
Fixeed assets	\(500,000	Common Stock	\)150,000
Less: Accumulated Depreciation	(150,000)	Paid in capital	70,000
Net fixed assets*	350,000	Retained earnings	100,000
Total assets	\(500,000	Total Liab. And equity	\)500,000

JONES CORPORATION
Sales (on credit)	\(1,250,000
Cost of goods sold	750,000
Gross profit	\)500,000
Selling and administrative expenses	257,000
Less: depreciation expenses	50,000
Operating profits	\(193,000
Interest expenses	8,000
Earning before taxes	\)185,000
Tax expenses	92,500
Net income	\(92,500

SMITH CORPORATION
Current assets		Liabilities
Cash	\(35,000	Accounts payable	\)75,000
Marketable securities	7,500	Bonds payable (long term)	210,000
Accounts receivable	70,000
Inventory	75,000
Long term assets		Stockholder鈥檚 equity
Fixed assets	\(500,000	Common stock	\)75,000
Less: accumulated depreciation	250,000	Paid in capital	30,000
Net fixed assets*	250,000	Retained earnings	47,500
Total assets	\(437,500	Total liab. And equity	\)437,500

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Short Answer

Step by step solution

Contribution

EBT

Degree of combined leverage of both companies

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Capital Structure
	Sinclair	Boswell
Deb @11%	\(900,000	0
Common stock, \)10 per share	600,000	\(1,500,000
Total	\)1,500,000	\(1,500,000
Common shares	60,000	150,000
Operating plans
Sales (55,000 units at \)20 each)	\(1,100,000	\)1,100,000
Less: variable cost	880,000 (\(16 per unit)	550,000 (\)10 per unit)
Fixed cost	0	305,000
Earnings before interest and taxes (EBIT)	\(220,000	\)245,000

SMITH CORPORATION
Sales (on credit)	\(1,000,000
Cost of goods sold	600,000
Gross profit	\)400,000
Selling and administrative expenses	224,000
Less: depreciation expenses	50,000
Operating profits	\(126,000
Interest expenses	21,000
Earning before taxes	\)105,000
Tax expenses	52,500
Net income	\(52,500