Assignment Financial Reporting & Analysis ch 9

Assignment Financial Reporting & Analysis ch 9 -...

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1 PROBLEM 9-1 Degree of Financial Leverage = Earnings Before Interest and Tax Earnings Before Tax $975,000 + $70,000 = $1,045,000 = 1.07 $975,000 $975,000 PROBLEM 9 - 2 a. Degree of Financial Leverage = Earnings Before Interest and Tax Earnings Before Tax = $1,000,000 $800,000 = 1.25 b. Prior earnings before interest and tax $ 1,000,000 10% increase 100,000 Adjusted income before interest and tax $ 1,100,000 Interest 200,000 Income before tax $ 900,000 Tax (50% rate) 450,000 Net income 450,000 Earnings will increase by 12.5% to $450,000 ($400,000 x 112.5% = $450,000) c. $800,000 200,000
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2 600,000 300,000 $300,000 This is a decline in profit of 25%, with a decline in earnings before interest and tax of 20%.
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3 PROBLEM 9-13 a. 1. Degree of Financial Leverage = Earnings Before Interest and Tax Earnings Before Tax 2011: $110,500 + $9,500 = 1.09 $110,500 2010: $107,700 + $6,600 = 1.06 $107,700 2009: $100,450 + $6,800 = 1.07 $100,450 2008: $124,100 + $6,900 = 1.06 $124,100 2007: $119,000 + $7,000 = 1.06 $119,000 2. Earnings Per Common Share 2011: Continuing operations $ 2.67* Extraordinary gain .69 $ 3.36 * Should be used in primary analysis. 2010: $2.57
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4 2009: $2.36 2008: $3.23 2007: $2.81 3. Price/Earnings Ratio = Market Price Per Share Fully Diluted Earnings Per Share 2011: $24.00 = 8.99 $2.67 2010: $22.00 = 8.56 $2.57 2009: $21.00 = 8.90 $2.36 2008: $37.00 = 11.46 $3.23 2007: $29.00 = 10.32 $2.81 4. Percentage of Earnings Retained = Net Income before nonrecurring items – All Dividends
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