Question

The answer is supposed to be B but I do not know why

13 Will Witham, Inc. has sales revenue of $26,000,000. The company's fixed costs total $10,000,000, its variable costs are 30 percent of sales, and its interest expense is $1,000,000. If the company wants to increase its EPS by 30%, how much will it need to increase its EBIT? a. 24.88 percent b. 26.34 percent c. 27.70 percent d. 28.13 percent e. 34.17 percent 79

Answer 1

Particular	Amount
Sales	26,000,000
less: Variables Cost @30% of sales	(7,800,000)
Gross profit	18,200,000
Less: Fixed Cost	(10,000,000)
EBIT	8,200,000
Less: Interest	(1,000,000)
Earning for shareholders	7,200,000

Note- Assuming no taxes as no rate is given.

EPS or earnings for shareholders is to be increased by 30%

After increase earnings for shareholders =$7200,000(1+30%)

= $ 9360,000

Interst Expenses will be same as nothing specifically mentioned = $ 1,000,000

After increase EBIT = After increase earnings for shareholders + Interest expenses

= $ 9360,000 + $1000,000

= $ 10,360,000

% change in EBIT = (After cahnge EBIT- Before change EBIT)/Before change EBIT

=($10360,000 - $ 8200,000)/$8200,000

= 26.34%

Hence, Option B

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