Corporate Finance 6 - Southland Industries Interest 16 of...

This preview shows page 1 - 4 out of 15 pages.

Southland IndustriesInterest 16% of $60,000 =$ 9,600 ITax Rate40%TPreferred Dividends $5 for 1,500 shares7,500 PDNumber of shares outstanding common4,000 NFormula for EPS[(EBIT - I) * (1-T)] - PDEPS = Na.EBIT = $ 24,600 [(24600 - 9600) * (1-.4)] - 75004000(15000 * .6) - 7500EPS = 40001,500 4,000 EPS = 0.375b.EBIT = $ 30,600 [(30600 - 9600) * (1-.4)] - 75004000(21000 * .6) - 7500EPS = 40005,100 4,000 EPS = 1.275c.EBIT = $ 35,000 [(35000 - 9600) * (1-.4)] - 75004000(25400 * .6) - 7500EPS = 40007,740 4,000 EPS = 1.935
Firm RFirm WSales100,000 unitsQSalesSales Price$ 2.00 eachPSales PriceVariable Costs$ 1.70 per unitVCVariable CostsFixed Costs$ 6,000 FCFixed CostsInterest$ 10,000 IInterestTax Rate40%TTax Ratea.Operating leverage at sales level for Firm REBIT for Firm RQ * (P - VC)EBIT = Sales - FDOL at Q = Q* (P-VC) - FCEBIT = 100000 * (2 - 1.7)100000 *(2-1.7) - 6000$ 30,000.00 $ 24,000.00 DOL = 1.25Financial Leverage for Firm REBITDFL = EBIT - I -(PD* (1/1-T))2400024000-10000- (0) 2400014000DFL = 1.71Total Leverage for Firm R DTL = DOL * DFLDTL = 2.14bOperating leverage at sales level for Firm WEBIT for Firm WQ * (P - VC)EBIT = Sales - FDOL at Q = Q* (P-VC) - FCEBIT = 100000 * (2.5 - 1)100000 *(2.5-1) - 62500$ 150,000.00 $ 87,500.00 DOL = 1.71Financial Leverage for Firm WEBIT
DFL = EBIT - I -(PD* (1/1-T))8750087500-17500- (0) 8750070000DFL = 1.25Total Leverage for Firm WDTL = DOL * DFLDTL = 2.14c.Of the two firms, Firm R has less operating risk compared to Firm W, but it more financial risk.

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture