TONEY_SHARON_2020SP1-FSMA-3010-02 Module 6.xlsx - P13–11...

a. $24,600
b. $30,600
c. $35,000
Interest rate 6%
Bond value $60,000
Interest paid $3,600
Preferred dividend per share $5
No. of preferred shares 1500
Total preferred dividend paid $7,500
Tax rate 40%
No of outtanding equity shares 4000
a EBIT $24,600
Net income before tax $13,500
Net income after tax $8,100
EPS $2.025
b EBIT $30,600
Net income before tax $19,500
Net income after tax $11,700
EPS $2.925
c EBIT $35,000
P13–11 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:

Net income before tax $23,900
Net income after tax $14,340
EPS $3.585

c. Compare the relative risks of the two firms.
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 costs 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 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.