Finance - EPS and EBIT; Discount Loan / Compensating Balance
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1. Southland Industries has $60,000 of 16% (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:
a. $24,600
b. $30,600
c. $35,000
2. Weathers Catering Supply, Inc. needs to borrow $150,000 for 6 months. State Bank
has offered to lend the funds at a 9% annual rate subject to a 10% compensating
balance. (Note: Weathers currently maintains $0 on deposit in State Bank). Frost
Finance Co. has offered to lend the funds at a 9% annual rate with discount-loan terms.
The principal of both loans would be payable at maturity as a single sum.
a. Calculate the effective annual rate of interest on each loan.
b. What could Weathers do that would reduce the effective annual rate on the State
Bank loan?
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