Coats Corp. Interest Expense Calculation and Analysis

What is the company's interest expense?

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Question

Coats Corp. generates $10,000,000 in sales. Its variable costs equal 85 percent 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 10 percent, its net income and EPS would increase 17.5 percent.

What is the company's interest expense? (Assume that the change in sales would have no effect on the company's tax rate.)

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A

Recall that DTL = % change in NI/% change in sales = 0.175/0.10 = 1.75.

DTL = (S - VC)/(S - VC - FC - I)

1.75 = ($10,000,000 - $8,500,000)/($10,000,000 - $8,500,000 - $500,000 - I)

1.75 = $1,500,000/($1,000,000 - I)

$1,500,000 = $1,750,000 - 1.75I

I = $142,857.14.

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