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    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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    Solution Summary

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