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Kiwi Airlines has fixed operating costs of $5.8 million, and its variable costs amount to 20 percent of sales revenue. The firm has $2 million in bonds outstanding with a coupon interest rate of 8 percent. Revenues for the firm are $8 million and the firm is in the 40 percent corporate income tax bracket. How will a 10 percent increase in operating income affect earnings per share

Respuesta :

Answer: 145%

Explanation:

Given that,

Fixed operating costs = $5.8 million

Variable costs amount = 20 percent of sales revenue

Outstanding Bonds = $2 million

Coupon Interest rate = 8 percent

Sales revenue = $8 million

Corporate income tax bracket = 40 percent

Current:

EBIT = Sales revenue - Variable costs - Fixed operating costs

= 8000000 - 1600000 - 5800000

= $600,000

EBT = EBIT - interest

= 600000 - 160000

= 440,000

EAT = EBT - Corporate income tax

= 440000 - 176000

= $264000

Proposed:

EBIT = Sales revenue - Variable costs - Fixed operating costs

= 8800000 - 1760000 - 5800000

= $1240000

EBT = EBIT - interest

=$1240000 - 160000

=$1080000

EAT = EBT - Corporate income tax

= $1080000 - 432000

= $648000

Increase in EAT = EAT(proposed) - EAT(current)

= $648000 - $264000

= $384000

% increase in EAT = [tex]\frac{384000}{264000}[/tex]

= 145%