Computation of EBIT and EPS
Not what you're looking for?
Tower Interiors has made the forecast of sales shown in the following table. Also given is the probability of each level of sales.
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 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 of sales.
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 its 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 the firm's financial risk.
Purchase this Solution
Solution Summary
Tower Interiors has made the forecast of sales shown in the following table. Also given is the probability of each level of sales.
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 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 of sales.
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 its 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 the firm's financial risk.
Solution Preview
For your review, I have attached a formatted MS Excel spreadsheet containing ...
Purchase this Solution
Free BrainMass Quizzes
Operations Management
This quiz tests a student's knowledge about Operations Management
Marketing Research and Forecasting
The following quiz will assess your ability to identify steps in the marketing research process. Understanding this information will provide fundamental knowledge related to marketing research.
Motivation
This tests some key elements of major motivation theories.
Academic Reading and Writing: Critical Thinking
Importance of Critical Thinking
Situational Leadership
This quiz will help you better understand Situational Leadership and its theories.