Ratio calculation
Not what you're looking for?
Can you help me get started with this assignment?
Laurel Street, president of Uvalde Manufacturing Inc. is preparing a proposal to present to her board of directors regarding a planned plant expansion that will cost $10 million.
At issue is whether the expansion should be financed with debt (a long-term note at First National Bank of Uvalde with an interest rate of 15%) or through the issuance of common stock (200,000 shares at $50 per share).
Uvalde Manufacturing currently has a capital structure of:
Debt (12% interest) 40,000,000
Equity 50,000,000
The firm's most recent income statement is presented next:
Sales $100,000,000
Cost of goods sold 65,000,000
Gross profit 35,000,000
Operating expenses 20,000,000
Operating profit 15,000,000
Interest expense 4,800,000
Earnings before tax 10,200,000
Income tax expense (40%) 4,080,000
Net income $ 6,120,000
Earnings per share (800,000 shares) $ 7.65
Laurel Street is aware that financing the expansion with debt will increase risk but could also benefit shareholders through financial leverage. Estimates are that the plant expansion will increase operating profit by 20%.The tax rate is expected to stay at 40%. Assume a 100% dividend payout ratio.
Required
a. Calculate the debt ratio, time interest earned, earnings per share, and the financial leverage index under each alternative, assuming the expected increase in operating profit is realized.
b. Discuss the factors the board should consider in making a decision.
Purchase this Solution
Solution Summary
The solution explains the calculation of debt ratio, time interest earned, earnings per share, and the financial leverage index
Purchase this Solution
Free BrainMass Quizzes
Academic Reading and Writing: Critical Thinking
Importance of Critical Thinking
Paradigms and Frameworks of Management Research
This quiz evaluates your understanding of the paradigm-based and epistimological frameworks of research. It is intended for advanced students.
Business Processes
This quiz is intended to help business students better understand business processes, including those related to manufacturing and marketing. The questions focus on terms used to describe business processes and marketing activities.
Organizational Leadership Quiz
This quiz prepares a person to do well when it comes to studying organizational leadership in their studies.
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.