Assignment 6.xlsx - P13-11 EPS calculations Southland...

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P13-11 EPS calculations Southland Industries has $60,000 of 16% (annual interest) bonds outstanding, 1,500 shares of preferred stock paying an annual dividend of $5 per share, and 4,000 shares of common stock outstanding. Assuming that the firm has a 40% tax rate, compute earnings per share (EPS) for the following levels of EBIT. ANSWER a. $24,600 N = Number of common stockholder shares outstanding = 4,000 Earnings per share =$0.375 b. $30,600 N = Number of common stockholder shares outstanding = 4,000 Earnings per share =$1.28 c. $35,000 EBIT = Earnings Before Interest and Taxes = $24,600 I = Interest amount that is paid to debt holders = ($60,000 x 0.16) = $9,600 T = Tax rate = 40% PD = Prefered Dividend that is paid to the preferred stock holders = (1,500 x $5) =$7,500 EBIT = Earnings Before Interest and Taxes = $30,600 I = Interest amount that is paid to debt holders = ($60,000 x 0.16) = $9,600 T = Tax rate = 40% PD = Prefered Dividend that is paid to the preferred stock holders = (1,500 x $5) =$7,500 EBIT = Earnings Before Interest and Taxes = $35,000 I = Interest amount that is paid to debt holders = ($60,000 x 0.16) = $9,600 T = Tax rate = 40% PD = Prefered Dividend that is paid to the preferred stock holders = (1,500 x $5) =$7,500 N = Number of common stockholder shares outstanding = 4,000 𝐸𝑃?=((1−𝑇)𝑥(𝐸𝐵𝐼𝑇−𝐼)−𝑃𝐷))/𝑛= 𝐸𝑃?=((1−40%)𝑥($24,600−$9,600)−$7,500)/4,000 𝐸𝑃?=((0.60𝑥$15,000)−$7,500)/4,000 𝐸𝑃?=$1,500/4000=0.375= 𝐸𝑃?=((1−40%)𝑥(30,600−$9,600)−$7,500 )/4,000 𝐸𝑃?=((0.60𝑥$21,000)−$7,500)/4,000 𝐸𝑃?=$5,100/4000=$1.275= 𝐸𝑃?=((1−40%)𝑥($35,000−$9,600)−$7,500)/4,000
Earnings per share =$1.94 𝐸𝑃?=((1−40%)𝑥($35,000−$9,600)−$7,500)/4,000 𝐸𝑃?=((0.60𝑥$25,400)−$7,500)/4,000 𝐸?𝑃=$7,740/4,000=$1.935=
P13-16 Integrative: Leverage and risk Firm R has sales of 100,000 units at $2.00 per unit, variable operating costs of $1.70 per unit, and fixed operating costs of $6,000. Interest is $10,000 per year. Firm W has sales of 100,000 units at $2.50 per unit, variable operating cost of $1.00 per unit, and fixed operating costs of $62,500. Interest is $17,500 per year. Assume that both firms are in the 40% tax braket. a. Compute the degree of operating, financial, and total leverage for firm R. b. Compute the degree of operating, financial, and total leverage for firm W. c. Compare the relative risk of the two firms.

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