Sterling Tire Company In Tutorial Library

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TITLE: Sterling Tire Company

CLASS / COURSE: Finance

QUESTION DESCRIPTION:

Complete problem 11 on page 143 ofFoundations of Financial Management.

 The Sterling Tire Company’s income statement for 2008 is as follows:

Given this income statement, compute the following:

 

STERLING TIRE COMPANY

Income Statement

For the Year Ended December 31, 2008

Sales (20,000 tires at $60 each) . . . . . . . . . . . . . . . . . . . . . . . . $1,200,000

Less: Variable costs (20,000 tires at $30) . . . . . . . . . . . . . . . 600,000

Fixed costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 400,000

Earnings before interest and taxes (EBIT) . . . . . . . . . . . . . . . . 200,000

Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,000

Earnings before taxes (EBT) . . . . . . . . . . . . . . . . . . . . . . . . . . . 150,000

Income tax expense (30%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45,000

Earnings after taxes (EAT) . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 105,000

 

a. Degree of operating leverage.

b. Degree of financial leverage.

c. Degree of combined leverage.

d. Break-even point in units.

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SUBJECTS / CATEGORIES:
1. Finance
2. Financial Management
3. Corporate Finance

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