Quick Launch Rocket Company, expects its sales to increase by 50 percent in the coming year. The firm's current earnings per share (EPS) is $3.25. Its degree of operating leverage is 1.6 and its degree of financial leverage is 2.1. What is the firm's projected EPS for the coming year?
A)$3.25
B)$5.46
C)$10.92
D)$8.71
E)$19.63

Question

Quizplus · Accepted Answer

First, we calculate the total degree of leverage: 
Degree of Leverage = Degree of Operating Leverage x Degree of Financial Leverage = 1.6 x 2.1 = 3.36

Next, we calculate the expected percentage increase in EPS: 
Expected % Increase in EPS = Degree of Leverage x Expected % Increase in Sales = 3.36 x 50% = 168%

Finally, we calculate the projected EPS: 
Projected EPS = Current EPS x (1 + Expected % Increase in EPS) = $3.25 x (1 + 1.68) = $3.25 x 2.68 = $8.71

Therefore, the projected EPS for the coming year is $8.71. The correct answer is D.

Quick Launch Rocket Company, Expects Its Sales to Increase by 50