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Candice Masesie M6 Written Assignment Corporate Finance
Problem 13-11, p. 597
EPS calculations: Southland Industries has $60,000 of 6% (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:
a. $24,600
b. $30,600
c. $35,000
To calculate the interest amount, use the following formula:
Interest = Dollar amount of bonds outstanding x Annual interest rate.
Interest = $60,000 x 6% = $3,600
To calculate preferred dividends, I will use the following formula:
Preferred dividends = Number of shares of preferred stock x Annual dividend per share.
Preferred dividend = 1,500 x $5 = $7,500
a. Compute earnings per share (EPS) for EBIT of $24,600.
b. Compute EPS for EBIT c. Compute EPS for EBIT $35,000

Candice Masesie M6 Written Assignment Corporate Finance
Problem 13-16, p. 598
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. Fir W has sales of 100,000 units at $2.50 per unit,
variable operating costs of $1.00 per unit, and fixed operating costs $62,500. Interest is $17,500 per year. Assume that
both firms are in the 40% tax bracket.
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.
d. Discuss the principals of leverage that your answers illustrate.
a. Compute the degree of operating, financial, and total leverage for firm R.

Candice Masesie M6 Written Assignment Corporate Finance