Problem 5-26 (Algo) Operating leverage and ratios [LO5-6] Ms. Gold is in the widget business. She currently sells 1.7 million widgets a year at $7 each. Her variable cost to produce the widgets is $5 per unit, and she has $1,680,000 in fixed costs. Her sales-to-assets ratio is seven times, and 40 percent of her assets are financed with 9 percent debt, with the balance financed by common stock at $10 par value per share. The tax rate is 40 percent. Her sister-in-law, Ms. Silverman, says Ms. Gold is doing it all wrong. By reducing her price to $6.00 a widget, she could increase her volume of units sold by 40 percent. Fixed costs would remain constant, and variable costs would remain $5 per unit. Her sales-to- assets ratio would be 8.0 times. Furthermore, she could increase her debt-to-assets ratio to 50 percent, with the balance in common stock. It is assumed that the interest rate would go up by 1 percent and the price of stock would remain constant. a. Compute earnings per share under the Gold plan. Note: Round your answer to 2 decimal places. Earnings per share

Problem 5-26 (Algo) Operating leverage and ratios [LO5-6] Ms. Gold is in the widget business. She currently sells 1.7 million widgets a year at $7 each. Her variable cost to produce the widgets is $5 per unit, and she has $1,680,000 in fixed costs. Her sales-to-assets ratio is seven times, and 40 percent of her assets are financed with 9 percent debt, with the balance financed by common stock at $10 par value per share. The tax rate is 40 percent. Her sister-in-law, Ms. Silverman, says Ms. Gold is doing it all wrong. By reducing her price to $6.00 a widget, she could increase her volume of units sold by 40 percent. Fixed costs would remain constant, and variable costs would remain $5 per unit. Her sales-to- assets ratio would be 8.0 times. Furthermore, she could increase her debt-to-assets ratio to 50 percent, with the balance in common stock. It is assumed that the interest rate would go up by 1 percent and the price of stock would remain constant. a. Compute earnings per share under the Gold plan. Note: Round your answer to 2 decimal places. Earnings per share

EBK CFIN

6th Edition

ISBN:9781337671743

Author:BESLEY

Publisher:BESLEY

Chapter15: Managing Short-term Assets

Section: Chapter Questions

Problem 13PROB

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