Baker_M6 - EBIT Less Interest Net profits before taxes Less...

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EBIT $ 24,600.00 $ 30,600.00 Less: Interest $ 9,600.00 $ 9,600.00 Net profits before taxes $ 15,000.00 $ 21,000.00 Less: Taxes $ 6,000.00 $ 8,400.00 Net profits after taxes $ 9,000.00 $ 12,600.00 Less: Preferred dividends $ 7,500.00 $ 7,500.00 Earnings available for common stockholders $ 1,500.00 $ 5,100.00 EPS $ 0.375 $ 1.28
$ 35,000.00 $ 9,600.00 $ 25,400.00 $ 10,160.00 $ 15,240.00 $ 7,500.00 $ 7,740.00 $ 1.94
Firm Units Unit Price Variable Cost Fixed Cost Interest Tax R 100,000 $ 2.00 $ 1.70 $ 6,000.00 $ 10,000.00 40% W 100,000 $ 2.50 $ 1.00 $ 62,500.00 $ 17,500.00 40% A. Firm R DOL $ 1.25 DFL $ 1.71 DTL $ 2.14 B. Firm W DOL $ 1.71 DFL $ 1.25 DTL $ 2.14 C. R has a lower operating risk, and W has a lower financial risk D. The answers above show that two firms can have the same total leverage but their operating and financial leverage can be different.
A. Probability of sales 0.20 0.60 0.20 Sales $ 200,000.00 $ 300,000.00 $ 400,000.00 Less: Variable cost $ 140,000.00 $ 210,000.00 $ 280,000.00 Less: Fixed cost $ 75,000.00 $ 75,000.00 $ 75,000.00 EBIT $ (15,000.00) $ 15,000.00 $ 45,000.00 B. EBIT $ (15,000.00) $ 15,000.00 $ 45,000.00 Less: Interest $ 12,000.00 $ 12,000.00 $ 12,000.00 Net profits before taxes $ (27,000.00) $ 3,000.00 $ 33,000.00 Less: Taxes $ (10,800.00) $ 1,200.00 $ 13,200.00 Net profits after taxes $ (16,200.00) $ 1,800.00 $ 19,800.00 Shares 10,000 10,000 10,000 EPS $ (1.62) $ 0.18 $ 1.98 Expected EPS $ 0.18 Standard Dev EPS $ 1.14 Coefficient of variation EPS 6.32 C. EBIT $ (15,000.00) $ 15,000.00 $ 45,000.00 Less: Interest $ - $ - $ - Net profits before taxes $ (15,000.00) $ 15,000.00 $ 45,000.00 Less: Taxes $ (6,000.00) $ 6,000.00 $ 18,000.00 Net profits after taxes $ (9,000.00) $ 9,000.00 $ 27,000.00 Shares 15,000 15,000 15,000 EPS $ (0.60) $ 0.60 $ 1.80 Expected EPS $ 0.60 Standard Dev EPS $ 0.76

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