20BP_b 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_b (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
b. If you combine Boswell鈥檚 capital structure with Sinclair鈥檚 operating plan, what is the degree of combined leverage?

Short Answer

Expert verified

The degree of combined leverage of both the companies is 1.

Step by step solution

Contribution

$\begin{array}{rcl} Contribution & = & Quantity 脳 (Sales price per unit - Variable cost per unit of Sinclair) \\ = & 55, 000 脳 ($ 20 - $ 16) \\ = & $ 220, 000 \end{array}$

EBT

$\begin{array}{rcl} EBT & = & Contribution - Fixed cost of Sinclair - Interest of boswell \\ = & $ 220, 000 - $ 0 - $ 0 \\ = & $ 220, 000 \end{array}$

Degree of combined leverage of both companies

$\begin{array}{rcl} Degree of combined leverage & = & \frac{Contribution}{EBT} \\ = & \frac{$ 220, 000}{$ 220, 000} \\ = & 1 \end{array}$

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Increase in accounts receivable	Decrease in prepaid expenses
Increase in notes payable	Increase in inventory
Depreciation expense	Dividend payment
Increase in investment	Increase in accrued expenses
Decrease in account payable

Stud Clothier
Balance sheet 20X1
Assets		Liabilities and Equity
Cash	\)60,000	Account payable	\(220,000
Account receivable	240,000	Accrued taxes	30,000
Inventory	350,000	Bonds payable (long term)	150,000
Plant and equipment	410,000	Common stock	80,000
		Paid in capital	200,000
		Retained earnings	380,000
Total assets	\)1,060,000	Total LIbilities and Equity	$1,060,000

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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