Purchase Solution

Business Finance Dividends, earnings per share, degree of operating level

Not what you're looking for?

Ask Custom Question

Sales............................................... $4,000,000
Less: Variable expense (50% of sales).... 2,000,000
Fixed expense............................ 1,500,000
Earnings before interest and taxes (EBIT)... 500,000
Interest (10% cost).............................. 140,000
Earnings before taxes (EBT).................. 360,000
Tax (30%)........................................ 108,000
Earnings after taxes (EAT).................. $252,000
Shares of common stock..................... 200,000
Earnings per share............................. $1.26

Highland Cable Company is currently financed with 50% debt and 50% equity (common stock, par value of $10). To expand the facilities Mr. Highland estimates a need for $2 million in additional financing. His investment broker has laid out three plans for him to consider:

1. Sell $3 million of debt at 13%
2. Sell $2 million of commons stock at $20 per share.
3. Sell $1 million of debt at 12% and $1 million of common stock at $25 per share.

Variable costs are expected to stay at 50% of sales, while fixed expenses will increase to $1,900,000 per year. Mr. Highland is not sure how much this expansion will add to sales, but he estimates that sales will rise by $1 million per year for the next five years.

A. The degree of operating leverage before expansion at sales of $4 million and for all three methods of financing after expansion. Assume sales of $5 million for the second part of this question.

B. Compute EPS under all three methods of financing the expansion at $5 million in sales (first year) and $9 million in sales (last year).

Purchase this Solution

Solution Summary

Sales............................................... $4,000,000
Less: Variable expense (50% of sales).... 2,000,000
Fixed expense............................ 1,500,000
Earnings before interest and taxes (EBIT)... 500,000
Interest (10% cost).............................. 140,000
Earnings before taxes (EBT).................. 360,000
Tax (30%)........................................ 108,000
Earnings after taxes (EAT).................. $252,000
Shares of common stock..................... 200,000
Earnings per share............................. $1.26

Highland Cable Company is currently financed with 50% debt and 50% equity (common stock, par value of $10). To expand the facilities Mr. Highland estimates a need for $2 million in additional financing. His investment broker has laid out three plans for him to consider:

1. Sell $3 million of debt at 13%
2. Sell $2 million of commons stock at $20 per share.
3. Sell $1 million of debt at 12% and $1 million of common stock at $25 per share.

Variable costs are expected to stay at 50% of sales, while fixed expenses will increase to $1,900,000 per year. Mr. Highland is not sure how much this expansion will add to sales, but he estimates that sales will rise by $1 million per year for the next five years.

A. The degree of operating leverage before expansion at sales of $4 million and for all three methods of financing after expansion. Assume sales of $5 million for the second part of this question.

B. Compute EPS under all three methods of financing the expansion at $5 million in sales (first year) and $9 million in sales (last year).

Purchase this Solution


Free BrainMass Quizzes
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.

SWOT

This quiz will test your understanding of the SWOT analysis, including terms, concepts, uses, advantages, and process.

Balance Sheet

The Fundamental Classified Balance Sheet. What to know to make it easy.

Introduction to Finance

This quiz test introductory finance topics.

Employee Orientation

Test your knowledge of employee orientation with this fun and informative quiz. This quiz is meant for beginner and advanced students as well as professionals already working in the HR field.