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1 December, 00:58

Last year, Cayman Corporation had sales of $7,000,000, total variable costs of $3,000,000, and total fixed costs of $1,500,000. In addition, they paid $480,000 in interest to bondholders. Cayman has a 35% marginal tax rate. If Cayman's sales increase 7%, what should be the increase in earnings per share?

a. 8.7%

b. 13.9%

c. 11.2%

d. 10.8%

e. 13.3%

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  1. 1 December, 01:09
    0
    b. 13.9%

    Explanation:

    sales 7,000,000

    variable cost (3,000,000)

    contribution 4,000,000

    fixed cost (1,500,000)

    interest (480,000)

    EBT 2,020,000

    tax expense (707,000)

    net income 1,313,000

    contribution margin 4,000,000 / 7,000,000 = 4/7

    if sales increase by 7%:

    7,000,000 x 0.07 x 4/7 x (1 - 0.35) = 182,000

    income after increase in sales: 1,313,000 + 182,000 = 1,495,000

    increase in earnings: 1,495,000 / 1,313,000 - 1 = 0.138613861 = 13.9%
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