Question

Debt and financial risk Tower Interiors has made the forecast of sales shown in the following table. Also given is the probability of each level of sales. Sales Probability $190,000 0.25 290,000 0.55 390,000 0.20 The firm has fixed operating costs of 575,000 and variable operating costs equal to 60% of the sales level. The company pays 511,400 in interest per period. The tax rate is 40% a. Compute the earnings before interest and taxes (EBIT) for each level of sales 6. Compute the earnings per share (EPS) for each level of sales, the expected EPS, the standard deviation of the EPS, and the coefficient of variation of EPS. c. Tawar has the opportunity to reduce its leverage to zero and pay no interest. This will require that the number of shares outstanding be increased to 15.600 a. Compute the camnings before interest and taxes (EBIT) for each level of sales. Calculate the EBIT below. (Round to the nearest dollar.) Probability Sales Less: Variable costs (60%) Less. Fixed costs EBIT 0.25 $ $ Enter any number in the edit fields and then click Check Answer 15 parts Clear All remaining Check Answer

Answer 1

Computation of EBIT and EPS at each level of sales 0.25 0.55 0.20 Particulars Sales $1,90,000.00 $2,90,000.00 $3,90,000.00 Less: Variable Cost @60% $1,14,000.00 $1,74,000.00 $2,34,000.00 Gross Profit $76,000.00 $1,16,000.00 $1,56,000.00 Less: Fixed Cost $75,000.00 $75,000.00 $75,000.00 |EBIT $1,000.00 $41,000.00 $81,000.00 Less: Interest EBT Less: Tax @40% PAT Number of shares EPS (PAT/Shares) $11,400.00 -$10,400.00 -$4,160.00 $6,240.00 10400 -$0.60 $11,400.00 $29,600.00 $11,840.00 $17,760.00 10400 $1.71 $11,400.00 $69,600.00 $27,840.00 $41,760.00 10400 $4.02 If Number of shares New EPS 15600 -$0.40 15600 $1.14 15600 $2.68

Expected Return (Mean) = [E(P*X)] Standard Deviation (risk) = V[E(P*(X-X)^2)] Coefficient of variation ESD / Mean Where X is the Return of Asset x is the Mean Pis the probability At Old EPS (A): Year Probability(P) EPS(A) Product (PA) Product P*[(A-A)^2] EPS Squared Deviation Deviation (A-A) [(A-A)^2] -2.1945 4.815830 0.1155 0.013340 2.4255 5.883050 1.203958 0.007337 1 0.25 -0.60 -0.1500 2 0.55 1.71 0.9405 3 0.20 4.02 0.8040 TOTAL 1.5945 Expected EPS(A) = $1.5945 Standard Deviation(Risk) = V2.387905 = 1.545 Coefficient of variation = 0.969 1.176610 2.387905 At New EPS (B): Year Probability(P) EPS(B) Product (P*B) Squared Deviation [(B-B)^2] 2.140369 Product P*[(B-B )^2] EPS Deviation (B-B) -1.4630 0.0770 1.6170 1 0.25 -0.1000 -0.40 1.14 2 0.55 0.6270 0.005929 0.535092 0.003261 0.522938 1.061291 2.614689 3 0.20 2.68 0.5360 TOTAL 1.0630 Expected EPSB = $1.063 Standard Deviation(Risk) = V1.0613 = 1.0302 Coefficient of variation = 0.969