## Corporate Finance

rishabhhurkat
Good Student
Posts: 24
Joined: Wed Dec 09, 2015 9:29 am

### Corporate Finance

Q.25% increase in sales of Irrelevant Corporation causes 50% growth in EPS If operating earnings of the company is \$ 12,000 and financial leverage is 1.5. Calculate operating earnings of the company if sales increase by 10% next year
a. 15000 Incorrect
b. 14000 Correct
c. 13000 Incorrect
Total leverage = EPS growth/sales growth.
Operating leverage (OL) = total leverage/financial leverage.
New operating income = old income *(1+ OL * sales growth)

The Steps i followed were as Follows:-

1.DTL = 2 (Change in EPS/ Change in Sales)
2. DOL = 1.33 (DTL/DFL)

3. on the basis of DOL Fixed Cost comes to 4000
4. Now as Sales rise by 10%, Contribution also Rise by 10%
5 New Contribution= 16000*1.1 = 17600
6. EBIT= Cont.-FC = 17600-4000 = 13600

edupristine
Finance Junkie
Posts: 964
Joined: Wed Apr 09, 2014 6:28 am

### Re: Corporate Finance

Hi Rishabh

your calculation and answer is right, but we took here the nearest one because 14000 is nearest to 13600.