Explore BrainMass
Share

Earnings per share, Leverage

This content was STOLEN from BrainMass.com - View the original, and get the already-completed solution here!

Winners Inc., a home appliances manufacturer, expects sales of 20,000 units at $5 per unit in the coming year and must meet the following obligations:

Variable operating costs of $2 per unit, fixed operating costs of $10,000, interest of $20,000, and preferred stock dividends of $12,000.
The firm is in the 40% tax bracket and has 5,000 shares of common stock outstanding.

a. Calculate the firm's levels of earnings per share associated with the expected sales of 20,000 units and with sales of 30,000 units.

b. Calculate the firm's degree of financial leverage (DFL), degree of operating leverage, and use the degree of total leverage (DTL) concept to determine the effect of increase.

© BrainMass Inc. brainmass.com October 24, 2018, 9:05 pm ad1c9bdddf
https://brainmass.com/business/finance/earnings-per-share-leverage-116419

Solution Preview

Winners Inc., a home appliances manufacturer, expects sales of 20,000 units at $5 per unit in the coming year and must meet the following obligations:
Variable operating costs of $2 per unit, fixed operating costs of $10,000, interest of $20,000, and preferred stock dividends of $12,000.
The firm is in the 40% tax bracket and has 5,000 shares of common stock outstanding.

a. Calculate the firm's levels of earnings per share associated with the expected sales of 20,000 units and with sales of 30,000 units.

No of units 20,000 30,000
Sales ...

Solution Summary

The expert calculates the earnings per share, degree of financial leverage (DFL), degree of operating leverage, and degree of total leverage.

$2.19
See Also This Related BrainMass Solution

Operating leverage and ratios

Operating leverage and ratios
Mr. Katz is in the widget business. He currently sells 2 million widgets a year at $4 each. His variable cost to produce the widgets is $3 per unit, and he has $1,500,000 in fixed costs. His sales-to-assets ratio is four times, and 40 percent of his assets are financed with 9 percent debt, with the balance financed by common stock at $10 per share. The tax rate is 30 percent.
His brother-in-law, Mr. Doberman, says Mr. Katz is doing it all wrong. By reducing his price to $3.75 a widget, he could increase his volume of units sold by 40 percent. Fixed costs would remain constant, and variable costs would remain $3 per unit. His sales-to-assets ratio would be 5 times. Furthermore, he could increase his debt-to-assets ratio to 50 percent, with the balance in common stock. It is assumed that the interest rate would go up by 1 percent and the price of stock would remain constant.
1. Compute earnings per share under the Katz plan.
2. Compute earnings per share under the Doberman plan.
3. Mr. Katz's wife does not think that fixed costs would remain constant under the Doberman plan but that they would go up by 20 percent. If this is the case, should Mr. Katz shift to the Doberman plan, based on earnings per share?

View Full Posting Details