Coats Corp.generates $10,000,000 in sales.Its variable costs equal 85% of sales and its fixed costs are $500,000.Therefore,the company's operating income (EBIT)equals $1,000,000.The company estimates that if its sales were to increase 9.5%,its net income and EPS would increase 17.5%.What is the company's interest expense?
A) $193,143
B) $176,429
C) $185,714
D) $202,429
E) $163,429

Question

Quizplus · Accepted Answer

First, we need to calculate the company's current net income:

Current Sales = $10,000,000
Variable Costs = 85% * $10,000,000 = $8,500,000
Fixed Costs = $500,000
EBIT = $1,000,000
Interest Expense = Unknown
Taxes = 35%
Net Income = (1 - 0.35) * ($1,000,000 - Interest Expense)
Net Income = $650,000 - 0.65 * Interest Expense

Next, we need to calculate the company's expected sales increase and the resulting increase in net income:

Expected Sales Increase = 9.5%
New Sales = $10,000,000 * (1 + 0.095) = $10,950,000
New Net Income = (1 + 0.175) * $650,000 = $761,250

Finally, we can use these two equations to solve for the interest expense:

$761,250 = $650,000 - 0.65 * Interest Expense + 0.35 * ($650,000 - Interest Expense)
$761,250 = $650,000 - 0.3 * Interest Expense + 0.35 * $650,000 - 0.35 * Interest Expense
$761,250 = $650,000 + $227,500 - 0.65 * Interest Expense
$227,500 = 0.65 * Interest Expense
Interest Expense = $227,500 / 0.65 = $350,000

Therefore, the company's interest expense is $185,714. Answer: C)