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Unformatted text preview: ors has made the forecast of sales shown in
the following table. Also given is the probability of each level of sales. 550 PART 4 Long-Term Financial Decisions Sales Probability $200,000 .20 300,000 .60 400,000 .20 The firm has fixed operating costs of $75,000 and variable operating costs equal
to 70% of the sales level. The company pays $12,000 in interest per period. The
tax rate is 40%.
a. Compute the earnings before interest and taxes (EBIT) for each level
b. Compute the earnings per share (EPS) for each level of sales, the expected
EPS, the standard deviation of the EPS, and the coefficient of variation of
EPS, assuming that there are 10,000 shares of common stock outstanding.
c. Tower has the opportunity to reduce leverage to zero and pay no interest.
This will require that the number of shares outstanding be increased to
15,000. Repeat part b under this assumption.
d. Compare your findings in parts b and c, and comment on the effect of the
reduction of debt to zero on th...
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