you have determined that your cutoff value at a level a=0.05 is 1.645 when testing whether the mean of a population is significantly different from 1.5. if you calculate a test statistic of 1.8 what is the proper conclusion? a. you reject h(o) b. you would need to calculate the confidence interval to determine significance c. you do not reject h(0) d. you would need to calculate the p-value to determine the significance Solution Since test statistic=1.8 is larger than critical value of 1.645, we reject Ho. Answer: a. you reject h(o).

1. You have developed the following pro forma income statement for your corporation. Sales $
45,689,000 Variable costs (22,777,000) Revenue before fixed costs $ 22,912,000 Fixed costs
(9,157,000) EBIT $ 13,755,000 Interest expense (1,273,000) Earnings before taxes $ 12,482,000
Taxes (50%) (6,241,000) Net income $ 6,241,000 It represents the most recent year's operations,
which ended yesterday. Your supervisor in the controller's office has just handed you a
memorandum asking for written responses to the following questions:
a. If sales should increase by 30%, by what percent would earnings before interest and taxes and
net income increase?
b.If sales should decrease by 30%, by what percent would earnings before interest and taxes and
net income decrease?
c. If the firm were to reduce its reliance on debt financing such that interest expense were cut in
half, howwould this affect your answers to parts a and b?
Solution
a. If Sales Increases by 30%, Variable Cost will also increase by 30%.
Increased Sales (by 30%) = $ 59,395,700
Less: Increased Variable Cost (By 30%) = $ 29,610,100
Contribution (Sales- Variable Cost) = $ 29,875,600
Less : Fixed Cost = $ 9,157,000
Earning Before Interest and Taxes(EBIT) = $ 20,628,600
Less : Interest Expenses = $ 12,73,000
Earning Before Taxes(EBT) = $ 19,355,600
Less : Tax (50%) = $ 9,677,800
Net Income (PAT) = $ 9,677,800
Percentage Change in Earning Before Interest and Taxes(EBIT) = $ (20,628,600-
1,375,000)/1,375,000
= 49.97%
Percentage Change in Net Income (PAT) = $ (9,677,800-6,241,000)/6,241,000
= 55.07%
b. If Sales decreases by 30%, Variable Cost will also decrease by 30%.
Decreased Sales (by 30%) = $ 31,982,300
Less: Decreased Variable Cost (By 30%) = $ 15,943,900
Contribution (Sales- Variable Cost) = $ 16,038,400
Less : Fixed Cost = $ 9,157,000

2. Earning Before Interest and Taxes(EBIT) = $ 6,881,400
Less : Interest Expenses = $ 12,73,000
Earning Before Taxes(EBT) = $ 5,608,400
Less : Tax (50%) = $ 2,804,200
Net Income (PAT) = $ 2,804,200
Percentage Change in Earning Before Interest and Taxes(EBIT) = $ (68,81,400-
1,375,000)/1,375,000
= (49.97%)
Percentage Change in Net Income (PAT) = $ (28,04,200-6,241,000)/6,241,000
= (55.07%)
c. If Interest Expense reduces to half i.e. $( 1,273,000*50%)
Then, Interest Expense = $ 636,500
Affect in Case a. :
Revised Earning Before Tax = $ (20,628,600-636,500)
= $ 19,992,100
Less : Tax (50%) = $ 9,996,050
Net Income = $ 9,996,050
Hence the Net Income has increased by $( 9,996,050-9,677,800)
= $ 318,250
% Change in net income = 318250 / 9677800 = 3.29%
Affect in Case b. :
Revised Earning Before Tax = $ (68,81,400-636,500)
= $ 6,244,900
Less : Tax (50%) = $ 3,122,450
Net Income = $ 3,122,450
Hence the Net Income has increased by $( 28,04,200-3,122,450)
= $ (318,250)
% Change In Net Income = (318,250) / 2804200 = -11.35%
Note that EBIT will not change because interest expense is accounted for after EBIT, hence
leaving the EBIT unchanged for a reduction in interest cost.