BUSI-320 Corporate Finance-2013 Fall-B (Moten) Exam-1

busi-320_corporate_finance-2013_fall-b_moten_exam-1_questions x

B

USI-320

C

orporate Finance-2013 Fall-B (Moten)

3. Problem 2-6 Income statement [LO1]

Given the following information, prepare an income statement for the Dental Drilling Company.

 

(Input all amounts as positive values. Omit the “

$

” sign in your response.)

   

 

  

Selling and administrative expense

$

73,000  

  Depreciation

expense

 

78,000  

  Sales

 

521,000  

  Interest

expense

 

48,000  

  Cost of goods sold

 

200,000  

  Taxes

 

47,000  

6.Problem 2-15 Development of balance sheet [LO3]

A

rrange the following items in proper balance sheet presentation (Be sure to list the assets in order of their liquidity. Input all amounts as positive values. Omit the “$” sign in your response):

 

 

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Accumulated depreciation

30

9,000  

  Retained earnings

187,000  

  Cash

1

4,000  

  Bonds payable

136,000  

  Accounts receivable

54,000  

  Plant and equipment—original cost

7

75,000  

  Accounts payable

35,000  

  Allowance for bad debts

9,000  

  Common stock

, $1 par, 100,000 shares outstanding

100,000  

  Inventory

70,000  

  Preferred stock, $59 par, 1,000 shares outstanding

59,000  

  Marketable securities

24,000  

  Investments

20,000  

  Notes payable

34,000  

  Capital paid in excess of par (common stock)

88,000  

 

9. Problem 2-18

Price

-earnings ratio [LO2]

Botox Facial Care had earnings after taxes of $364,000 in 2009 with 200,000 shares of stock outstanding. The stock price was $93.80. In 2010, earnings after taxes increased to $424,000 with the same 200,000 shares outstanding. The stock price was $133.00.

 

(a)

Compute earnings per share and the P/E ratio for 2009. The P/E ratio equals the stock price divided by earnings per share. (Enter only numeric values.Round your intermediate calculations and final answers to 2 decimal places. Omit the “$” sign in your response.)

 

 

 

  

Earnings per share

$

   

  P/E ratio

 

(b)

Compute earnings per share and the P/E ratio for 2010. (Enter only numeric values.Round your intermediate calculations and final answers to 2 decimal places. Omit the “$” sign in your response.)

 

 

 

  Earnings per share

  P/E ratio

 

(c)

Why the P/E ratio changed? (Round your intermediate calculations and final answers to 2 decimal places. Omit the “%” sign in your response.)

10.Problem 2-21 Depreciation and cash flow [LO5]

The

Jupiter

Corporation has a gross profit of $789,000 and $249,000 in depreciation expense. The

Saturn

Corporation also has $789,000 in gross profit, with $46,600 in depreciation expense. Selling and administrative expense is $216,000 for each company.

   (a)

Given that the tax rate is 40 percent, compute the cash flow for both companies. (Omit the “$” sign in your response.)

  

 

Jupiter Saturn

  Cash flow

$  

 

  

(b)

What is the difference in cash flow between the two firms? (Omit the “$” sign in your response.)

  

$   

  Difference in cash flow

12. Problem 2-24 Book value and market value [LO2, 3]

The Rockford Corporation has assets of $444,000, current liabilities of $51,000, and long-term liabilities of $71,000. There is $35,500 in preferred stock outstanding; 20,000 shares of common stock have been issued.

  

(a)

Compute book value (net worth) per share. (Round your answer to 2 decimal places. Omit the “$” sign in your response.)

  


  Book value per share

  

(b)

If there is $25,700 in earnings available to common stockholders and Rockford’s stock has a P/E of 19 times earnings per share, what is the current price of the stock? (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the “$” sign in your response.)

  


  Current price

  

(c)

What is the ratio of market value per share to book value per share? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

  

  Ratio

13.Problem 2-25 Book value and market value [LO2, 3]

Amigo Software, Inc., has total assets of $824,000, current liabilities of $164,000, and long-term liabilities of $133,000. There is $83,000 in preferred stock outstanding. Thirty thousand shares of common stock have been issued.

 

(a)

Compute book value (net worth) per share. (Round your answer to 2 decimal places. Omit the “$” sign in your response.)

 

  Book value per share

 

(b)

If there is $53,000 in earnings available to common stockholders and the firm’s stock has a P/E of 28 times earnings per share, what is the current price of the stock? (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the “$” sign in your response.)

 

  Current price

 

(c)

What is the ratio of market value per share to book value per share? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

 

  Ratio

14. Problem 2-28 Statement of cash flows [LO4]

Given is the

Income Statement

for the year ended December 31, 2010, Statement of Retained Earnings for the year ended December 31, 2010 and Comparative

Balance Sheet

s for 2009 and 2010 of Jeter Corporation:

    JETER CORPORATION

Income Statement

For the Year Ended December 31, 2010   Sales

$

3,9

40,000  

  Cost of goods sold

 

2,5

80,000  

  

    

 Gross profits

 

1,360,000  

  Selling and administrative expense

 

697,000  

  Depreciation expense

 

272,000  

  

     

Operating income

 

391,000  

  Interest expense

 

88,000  
 

   

  Earnings before taxes

 

303,000  

  Taxes

 

234,000  

  

   

  Earnings after taxes

 

69,000  

  Preferred stock dividends

 

10,000  

  

  Earnings available to common stockholders

$

59,000  

  Shares outstanding

 

150,000  

  Earnings per share

$

0.39  

  

$

 

 

$

Statement of Retained Earnings
For the Year Ended December 31, 2010

  Retained earnings, balance, January 1, 2010

342,700  

     Add: Earnings available to common stockholders, 2010

59,000  

     Deduct: Cash dividends declared and paid in 2010

218,000  

  Retained earnings, balance, December 31, 2010

183,700  

  

 

 

 

 

 

 

 

 

 

 

 

 

$

 

$

 

 

 

 

 

 

697,000  

 

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

 

 

 

 

 

$

 

$

 

 

 

 

 

 

 

 

 

 

 

 

$

 

$

 

 

 

514,000  

 

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

90,000  

 

150,000  

 

 

150,000  

 

 

 

350,000  

 

342,700  

 

 

  

 

 

 

 

  

 

$

2,025,500  

 

$

2,198,800  

  

 

Comparative Balance Sheets
For 2009 and 2010

 Year-End
2009

Year-End
2010 

  Assets

  Current assets:

     Cash

171,000  

127,000

 

     Accounts receivable (net)

543,000  

5

46,000  

     Inventory

6

56,000  

     Prepaid expenses

63,500  

39,700  

   

 

   Total

current assets

 1,433,500  

1,409,700  

     Investments (long-term securities)

92,000  

81,100  

     Plant and equipment

2,250,000  

2,7

30,000  

     Less: Accumulated depreciation

1,750,000  

2,022,000  

     Net plant and equipment

500,000  

708,000  

  Total assets

2,025,500  

2,198,800  

  Liabilities and Stockholders’ Equity

  Current liabilities:

     Accounts payable

365,000  

626,000  

     Notes payable

514,000  

     Accrued expenses

79,800  

57,100  

  

 

    Total

current liabilities

9

58,800  

1,197,100  

  Long-term liabilities:

     Bonds payable

, 2015

134,000  

228,000  

  

     Total liabilities

1,092,800  

1,425,100  

  Stockholders’ equity:

     Preferred stock, $100 par value

90,000  

     Common stock, $1 par value

     Capital paid in excess of par

350,000  

     Retained earnings

 183,700  

       Total stockholders’ equity

932,700  

773,700  

  Total liabilities and stockholders’ equity

  

Prepare a statement of cash flows for the Jeter Corporation. (

Amount

s to be deducted should be indicated with a minus sign. Omit the “$” sign in your response.)

  

 16.Problem 2-4 Operating profit [LO1]

A-Rod Fishing Supplies had sales of $2,180,000 and cost of goods sold of $1,280,000. Selling and administrative expenses represented 15 percent of sales. Depreciation was 6 percent of the total assets of $4,840,000.

 

What was the firm’s operating profit? (Omit the “$” sign in your response.)

 


  Operating profit

20.Problem 3-17 Interpreting results from the Du Pont system of analysis [LO3]

Assume the following data for Cable Corporation and Multi-Media, Inc.

 

 

$

 

$

 

  Sales

 

 

 

 

  Total assets

 

 

 

 

 

 

 

 

 

 

 

 

Cable
Corporation

Multi
Media, Inc.

  Net income

32,400

127,000

377,000

2,830,000

408,000

925,000

  Total debt

195,000

547,000

  Stockholders’ equity

213,000

378,000

 

(a-1)

Compute return on stockholders’ equity for both firms. (Round your answers to 2 decimal places. Omit the “%” sign in your response.)

 

 

Return on
stockholders’ equity

  Cable Corporation

  Multi Media, Inc.

 

 

 

(a-2)

Which firm has the higher return?

 

(b)  

Compute the following additional ratios for both firms. (Enter only numeric values rounded to 2 decimal places. Omit the “%” sign in your response.)

 

22.Problem 3-24 Debt utilization and Du Pont system of analysis [LO3]

Using the income statement for J. Lo Wedding Gowns, compute the following ratios:

  Sales

$

 

  

 

 

 

  

$

 

  

$

 

  

$

  

 

 

J. LO WEDDING GOWNS
Income Statement

291,000  

     Less: Cost of goods sold

172,000  

  Gross profit

119,000  

     Less: Selling and administrative expense

45,800  

     Less: Lease expense

13,300  

  Operating profit

*

59,900  

     Less: Interest expense

8,300  

  Earnings before taxes

51,600  

     Less: Taxes

(30%)

20,640  

  Earnings after taxes

30,960  

  *Equals income before interest and taxes.

(a)

Compute the interest coverage ratio. (Enter only numeric value rounded to 2 decimal places.)

(b)

Compute the fixed charge coverage ratio. (Enter only numeric value rounded to 2 decimal places.)

(c)

The total assets for this company equal $236,000. Compute the return on assets (investment). (Round your answer to 2 decimal places. Omit the “%” sign in your response.)

25. Problem 3-31 Inflation and inventory accounting effect [LO5]

The Canton Corporation shows the following income statement. The firm uses FIFO inventory accounting.

   

CANTON CORPORATION
Income Statement for 2010

  Sales

$

224,750  

 (15,500 units at $14.50)

  Cost of goods sold

 

135,625  

 (15,500 units at $8.75)

 

 
  Gross profit

 

89,125  

 
  Selling and administrative expense

 

13,485  

 
  Depreciation

 

11,000  

 

 

 

  Operating profit

 

64,640  

 

  Taxes (30%)

 

19,392  

 

 

 

  After tax income

$

45,2

48  

 
 

 


    

(a)

Assume in 2011 the same 15,500-unit volume is maintained, but the sales price increases by 10 percent. Because of FIFO inventory policy, old inventory will still be charged off at $8.75 per unit. Also assume selling and administrative expense will be 6 percent of sales and depreciation will be unchanged. The tax rate is 30 percent. Compute after tax income for 2011. (Round your answer to the nearest whole number. Omit the “$” sign in your response.)

   

  After tax income

    

(b)

In part a, by what percent did after tax income increase as a result of a 10 percent increase in the sales price? (Round your answer to 2 decimal places. Omit the “%” sign in your response.)

  

  Gain in after tax income

   

(c)

Now assume that in 2012 the volume remains constant at 15,500 units, but the sales price decreases by 15 percent from its year 2011 level. Also, because of FIFO inventory policy, cost of goods sold reflects the inflationary conditions of the prior year and is $9.25 per unit. Further, assume selling and administrative expense will be 6 percent of sales and depreciation will be unchanged. The tax rate is 30 percent. Compute the after tax income. (Round your sales price to 2 decimal places and final answer to the nearest dollar amount. Omit the “$” sign in your response.)

   

  After tax income

27. Problem 3-36 Comparing all the ratios [LO2]

December 31, 2010

  Assets

 

 

  Current assets:

 

 

     Cash

$

 

     Accounts receivable (net)

 

     Inventory

 

 

$

  Investments

 

63,500  

 

 

 

 

     Less: Accumulated depreciation

 

     Net plant and equipment

 

 

  Total assets

$

 

 

 

  Current liabilities:

 

 

     Accounts payable

$

     Notes payable

 

 

 

 

  Long-term liabilities:

 

 

 

 

$

  Stockholders’ equity

 

 

 

100,000  

     Common stock, $1 par value

 

     Capital paid in excess of par

 

     Retained earnings

 

 

 

 

$

940,500  

 

SNIDER CORPORATION

Balance Sheet

51,800  

     Marketable securities

24,200  

174,000  

2

27,000  

        Total current assets

477,000  

  Plant and equipment.

646,000  

(246,000) 

400,000  

940,500  

  Liabilities and Stockholders’ Equity

91,100  

73,400  

   

  Accrued taxes

18,400  

        Total current liabilities

182,900  

     Bonds payable

156,700  

     Total liabilities

339,600  

     Preferred stock, $50 par value

80,000  

190,000  

2

30,900  

        Total stockholders’ equity

600,900  

  Total liabilities and stockholders’ equity

 

$

 

     Less: Cost of goods sold

 

 

 

  Gross profit

 

 

 

 

 

 

     Less: Interest expense

 

 

 

 

 

 

 

 

$

 

 

SNIDER CORPORATION
Income Statement
For the Year Ending December 31, 2010

  Sales (on credit)

2,034,000

1,308,000

726,000

     Less: Selling and administrative expenses

488,000

*

  Operating profit (EBIT)

238,000

34,900

  Earnings before taxes (EBT)

203,100

     Less: Taxes

89,300

  Earnings after taxes (EAT)

113,800

*Includes $36,600 in lease payments.

 

Using the above financial statements for the Snider Corporation, calculate the following ratios. (Enter only numeric values rounded to 2 decimal places. Omit the “%” sign in your response.)

 

28. Problem 3-37 Ratio computation and analysis [LO2]

Given the financial statements for Jones Corporation and Smith Corporation:

  

  Cash

$

127,000  

  Accounts payable

$

136,000  

  Accounts receivable

 

 

  Inventory

 

 

 

 

$

$

150,000  

     Less: Accumulated depreciation

 

 

70,000  

 

  Retained earnings

 

 

 

$

$

770,900  

 

 

JONES CORPORATION

Current Assets

Liabilities

186,400  

  Bonds payable (long term)

81,600  

55,400  

Long-Term Assets

  Stockholders’ Equity

  Fixed assets

553,000  

  Common stock

(150,900) 

  Paid-in capital

   

  Net fixed assets*

402,100  

333,300  

       Total assets

770,900  

       Total liabilities and equity

     

 

  Sales (on credit)

$

  Cost of goods sold

 

 

  Gross profit

 

 

 

 

  Operating profit

 

  Interest expense

 

 

  Earnings before taxes

 

 

 

  Net income

$

 

1,339,000  

788,000  

551,000  

     Selling and administrative expense†

334,000  

     Less: Depreciation expense

54,500  

162,500  

10,200  

152,300  

  Tax expense

99,000  

53,300  

   

*Use net fixed assets in computing fixed asset turnover.

†Includes $15,200 in lease payments.

   

Current Assets

Liabilities

  Cash

$

  Accounts payable

$

  Marketable securities

 

  Bonds payable (long term)

 

  Accounts receivable

 

 

 

 

  Inventory

 

 

 

 

Long-Term Assets

  Fixed assets

$

551,000  

  Common stock

$

     Less: Accumulated depreciation

 

  Paid-in capital

 

 

  Retained earnings

 

 

 

       Total assets

$

       Total liabilities and equity

$

502,200  

 

 

SMITH CORPORATION

40,000  

76,700  

13,200  

246,000  

78,800  

77,800  

Stockholders’ Equity

75,000  

(258,600) 

30,000  
  Net fixed assets*

292,400  

74,500  

502,200  

   

*Use net fixed assets in computing fixed asset turnover.

   

SMITH CORPORATION

  Sales (on credit)

$

  Cost of goods sold

 

 

  Gross profit

 

     Selling and administrative expense†

 

     Less: Depreciation expense

 

 

  Operating profit

 

  Interest expense

 

 

  Earnings before taxes

 

  Tax expense

 

 

  Net income

$

 

1,190,000  

695,000  

495,000  

257,000  

58,800  

179,200  

30,900  

148,300  

55,700  

92,600  

   

†Includes $15,200 in lease payments.

   

(a-1)

 

 

Compute the following ratios. (Use 360 days for a year. Enter only numeric values rounded to 2 decimal places. Omit the “%” sign in your response.)

  

(a-2)

 

 

To which one would you, as credit manager for a supplier, approve the extension of (short-term) trade credit?

     

(b)  

In which one would you buy stocks?

rev: 10_05_2012 
29. Problem 4-1 Growth and financing [LO4]

Philip Morris is excited because sales for his clothing company are expected to double from $730,000 to $1,460,000 next year. Philip notes that net assets (Assets – Liabilities) will remain at 50 percent of Sales. His clothing firm will enjoy a 10 percent return on total sales. He will start the year with $330,000 in the bank and is already bragging about the two Mercedes he will buy and the European vacation he will take.

(a)

Compute his likely cash balance or deficit for the end of the year. Start with beginning cash and subtract the asset buildup (equal to 50 percent of the sales increase) and add in profit. (Negative amount should be indicated by a minus sign. Omit the “$” sign in your response.)

(b)

 

 

Does his optimistic outlook for his cash position appear to be correct?

31. Problem 4-4 Sales projections [LO2]

The Alliance Corp. expects to sell the following number of units of copper cables at the prices indicated, under three different scenarios in the economy. The probability of each outcome is indicated.

$

 

 

Outcome

Probability

Units

Price
A

.20     

29

0   

  

33  

B

.70     

500     

48  
C

.10     

770     

58  

What is the expected value of the total sales projection? (Omit the “$” sign in your response.)

 32.Problem 4-6 Sales projections [LO2]

Cyber Security Systems had sales of 4,000 units at $90 per unit last year. The marketing manager projects a 25 percent increase in unit volume sales this year with a 30 percent price increase. Returned merchandise will represent 12 percent of total sales.

 

What is your net dollar sales projection for this year? (Omit the “$” sign in your response.)

 

$   

  Net sales

34.Problem 4-11 Cost of goods sold-FIFO [LO2]

On December 31 of last year, Wolfson Corporation had in inventory 540 units of its product, which cost $21 per unit to produce. During January, the company produced 940 units at a cost of $24 per unit.

 

Assuming that Wolfson Corporation sold 980 units in January, what was the cost of goods sold (assume FIFO inventory accounting)? (Omit the “$” sign in your response.)

 

  Cost of goods sold


38.Problem 4-19 Schedule of cash receipts [LO2]

Watt’s Lighting Stores made the following sales projections for the next six months. All sales are credit sales.

 

 

$

 

 

  March

32,000  

    June

$ 36,000  

  April

38,000  

    July

44,000  

  May

27,000  

    August

46,000  

 

Sales in January and February were $35,000 and $34,000, respectively.
      Experience has shown that of total sales, 10 percent are uncollectible, 30 percent are collected in the month of sale, 40 percent are collected in the following month, and 20 percent are collected two months after sale.

 

(a)

Prepare a monthly cash receipts schedule for the firm for March through August. (Omit the “$” sign in your response.)

 

(b)

Of the sales expected to be made during the six months from March through August, how much will still be uncollected at the end of August? How much of this is expected to be collected later? (Omit the “$” sign in your response.)

  

$   


Amount

  Uncollected

  Expected to be collected

40. Problem 4-28 Percent-of-sales method [LO3]

 

The Manning Company has financial statements as shown below, which are representative of the company’s historical average.

   The firm is expecting a 40 percent increase in sales next year, and management is concerned about the company’s need for external funds. The increase in sales is expected to be carried out without any expansion of fixed assets, but rather through more efficient asset utilization in the existing store. Among liabilities, only current liabilities vary directly with sales.

  

Income Statement
  Sales

$

 

 

$

 

 

  Earnings before taxes

$

  Taxes

 

 

  Earnings after taxes

$

$

210,000  

  Expenses

151,900  

  Earnings before interest and taxes

58,100  

  Interest

9,300  

48,800  

17,300  

31,500  

  Dividends

9,450  

  

Balance Sheet
  Cash

$

  Accounts payable

$

  Accounts receivable

 

 

  Inventory

 

 

 

 

$

$

  Fixed assets

88,000  

  Notes payable

9,300  

 

   

 

 

  Common stock

 

127,000  

 

 

  Retained earnings

 

 

 

  Total assets

$

$

214,000  

 

 

Assets

Liabilities and Stockholders’ Equity

4,000  

22,200  

56,000  

  Accrued wages

2,350  

66,000  

  Accrued taxes

4,850  

   Current assets

126,000  

    Current liabilities

29,400  

  Long-term debt

26,500  

21,800  

214,000  

  Total liabilities and
    stockholders’ equity

   

Using the percent-of-sales method, determine the amount of external financing needs, or a surplus of funds required by the company. (Hint: A profit margin and payout ratio must be found from the income statement.) (Do not round intermediate calculations. Input the amount as positive value. Omit the “$” sign in your response.)

  

rev: 09_10_2011
 
41. Problem 5-5 Break-even analysis [LO2]

Eaton Tool Company has fixed costs of $232,400, sells its units for $62, and has variable costs of $34 per unit.

 

(a)

Compute the break-even point.

  Break-even point

 

units  

 

(b)

Ms. Eaton comes up with a new plan to cut fixed costs to $180,000. However, more labor will now be required, which will increase variable costs per unit to $37. The sales price will remain at $62. What is the new break-even point? (Round your answer to the nearest whole number.)

 units  

  New break-even point

(c)

 

 

Under the new plan, what is likely to happen to profitability at very high volume levels (compared to the old plan)?

(c)

With less operating leverage and a smaller contribution margin, profitability is likely to be less than it would have been at very high volume levels.

42.Problem 5-8 Cash break-even analysis [LO2]

Air Purifier, Inc., computes its break-even point strictly on the basis of cash expenditures related to fixed costs. Its total fixed costs are $2,520,000, but 20 percent of this value is represented by depreciation. Its contribution margin (price minus variable cost) for each unit is $54. How many units does the firm need to sell to reach the cash break-even point? (Round your answer to the nearest whole number.)

 

  Cash break-even point

units  

45. Problem 5-12 Break-even point and degree of leverage [LO2, 5]

Mo & Chris’s Delicious Burgers, Inc., sells food to Military Cafeterias for $19 a box. The fixed costs of this operation are $98,000, while the variable cost per box is $12.

   

(a)

What is the break-even point in boxes?

   

  Break-even point

 boxes  

   

(b)

Calculate the profit or loss on 13,000 boxes and on 28,000 boxes. (Input all amounts as positive values. Omit the “$” sign in your response.)

   

Amount

 

 

$   

Boxes

Profit/Loss

$  

   

(c)

What is the degree of operating leverage at 18,000 boxes and at 28,000 boxes? (Enter only numeric value rounded to 2 decimal places.)

   

Boxes

          

Degree of
operating leverage

         

 

   

(d)

If the firm has an annual interest expense of $10,200, calculate the degree of financial leverage at both 18,000 and 28,000 boxes.(Enter only numeric value rounded to 2 decimal places.)

   

Boxes

          

          

Degree of
financial leverage

    

(e)

What is the degree of combined leverage at both sales levels? (Enter only numeric value rounded to 2 decimal places.)

   

Boxes

         

Degree of
combined leverage

         

rev: 02_23_2012, 06_13_2013_QC_31736 
 46. Problem 5-16 Earnings per share and financial leverage [LO4]

Cain

Auto Supplies and

Able

Auto Parts are competitors in the aftermarket for auto supplies. The separate capital structures for Cain and Able are presented below.

  

 

$

 

$

 

540,000  

 

 

270,000  

 

 

 

$

 

$

810,000  

 

54,000  

 

 

27,000  

Cain Able

  

Debt @ 8%

270,000  

Debt @ 8%

540,000  

  

Common stock, $10 par

Common stock, $10 par
    Total

810,000  

   Total

  

Common shares

Common shares

  

(a)

Compute earnings per share if earnings before interest and taxes are $54,000, $64,800, and $72,000 (assume a 10 percent tax rate). (Round your answers to 2 decimal places. Leave no cells blank – be certain to enter “0” wherever required. Omit the “$” sign in your response.)

  

 

Cain

Able

$   

$   

$   

$   

$   

$   

  Earnings per share at $54,000

  Earnings per share at $64,800

  Earnings per share at $72,000

(b)

What is the relationship between earnings per share and the level of EBIT?

  

 

 

 

  1. Before tax return on assets is less than cost of Debt

  2. Before tax return on assets equals cost of Debt

  3. Before tax return on assets is greater than cost of Debt

  

(c)

If the cost of debt went up to 10 percent and all other factors remained equal, what would be the break-even level for EBIT? (Omit the “$” sign in your response.)

  

$   

  Break-even level

 
47.Problem 5-18 Combining operating and financial leverage [LO5]

Sterling

Optical and

Royal

Optical both make glass frames and each is able to generate earnings before interest and taxes of $146,000.  
   The separate capital structures for Sterling and Royal are shown below:

Sterling Royal

$

  Debt @ 10%

$

 

  Common stock, $5 par

 

 

 

$

     Total

$

1,460,000  

  Common shares

 

  Common shares

 

  Debt @ 10%

876,000  

292,000  

  Common stock, $5 par

584,000  

1,168,000  

     Total

1,460,000  

 116,800  

233,600  

(a)

Compute earnings per share for both firms. Assume a 25 percent tax rate. (Round your answers to 2 decimal places. Omit the “$” sign in your response.) 

 

$  


Earnings per share

  Sterling

  Royal

(b)

In part a, you should have gotten the same answer for both companies’ earnings per share. Assuming a P/E ratio of 19 for each company, what would its stock price be? (Use rounded Earnings per share.Round your answer to 2 decimal places. Omit the “$” sign in your response.)

 

 Stock price

(c)

Now as part of your analysis, assume the P/E ratio would be 13 for the riskier company in terms of heavy debt utilization in the capital structure and 24 for the less risky company. What would the stock prices for the two firms be under these assumptions? (Note: Although interest rates also would likely be different based on risk, we will hold them constant for ease of analysis.) (Use rounded Earnings per share. Round your answers to 2 decimal places. Omit the “$” sign in your response.)   

 

  Sterling

  Royal

 Stock price

48. Problem 5-20 Combining operating and financial leverage [LO5]

Sinclair

Manufacturing and

Boswell

Brothers Inc. are both involved in the production of brick for the homebuilding industry. Their financial information is as follows:

 

 

 

$

 

 

 

 

$

 

 

    Total

$

2,100,000   

 

$

2,100,000   

  Common shares

 

 

 

 

 

 

 

 

$

 

$

1,220,000   

 

 

 

 

 

($

 

0   

 

 

 

 

$

 

$

 

 

Capital Structure

Sinclair Boswell

  Debt @ 11%

1,260,000   

0   

  Common stock, $10 per share

840,000   

2,100,000   

84,000   

210,000   

  Operating Plan

  Sales (61,000 units at $20 each)

1,220,000   

    Less: Variable costs

976,000   

610,000   

($

16 per unit)  

10 per unit)  

    Fixed costs

311,000   

  Earnings before interest and taxes (EBIT)

244,000   

299,000   

(a)

If you combine Sinclair’s capital structure with Boswell’s operating plan, what is the degree of combined leverage? (Enter only numeric value rounded to 2 decimal places.) 

  

  Degree of combined leverage

 

(b)

If you combine Boswell’s capital structure with Sinclair’s operating plan, what is the degree of combined leverage? (Enter only numeric value.)

  Degree of combined leverage

  

(d)

In part b, if sales double, by what percentage will EPS increase? (Omit the “%” sign in your response.)

  EPS will increase by

 %  

 

Are you stuck with your online class?
Get help from our team of writers!