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Finance - EPS and EBIT; Discount Loan / Compensating Balance

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?

Solution Summary

Detailed solutions are provided to the two finance problems. Solutions are in .pdf or Word .doc formats.