EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN: 9781337514835
Author: MOYER
Publisher: CENGAGE LEARNING - CONSIGNMENT
expand_more
expand_more
format_list_bulleted
Question
Chapter 14, Problem 17P
Summary Introduction
To compute: Earning per share of the company.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
Blums Inc. expects its operating income over the coming year to equal $1.3 million, with a standard deviation of $195,000. Its coefficient of variation is equal to 0.15. Blums must pay interest charges of $800,000 next year and preferred stock dividends of $150,000. Blums’ marginal tax rate is 40 percent. What is the probability that Blums will have negative earnings per share next year? (Assume that operating income is normally distributed.) Use Table V to answer the question. Round your answer to two decimal places.
%
Hebner Housing Corporation has forecast the following numbers for this upcoming year: Sales = $1,000,000. Cost of goods sold = 600,000. Interest expense = 100,000. Net income = 180,000.The company is in the 40 percent tax bracket. Its cost of goods sold always represents 60 percent of its sales. That is, if the company’s sales were to increase to $1.5 million, its cost of goods sold would increase to $900,000. The company’s CEO is unhappy with the forecast and wants the firm to achieve a net income equal to $240,000. In order to achieve this level of net income, what level of sales will the company have to achieve? Assume that Hebner’s interest expense remains constant.
Grommit Engineering expects to have net income next year of $24.36 million and free cash flow of $22.17
million. Grommit's marginal corporate tax rate is 35%.
a. If Grommit increases leverage so that its interest expense rises by $6.7 million, how will net income
change?
b. For the same increase in interest expense, how will free cash flow change?
a. If Grommit increases leverage so that its interest expense rises by $6.7 million, how will net income
change?
Net income will fall to $ 4.36 million. (Round to two decimal places.)
b. For the same increase in interest expense, how will free cash flow change? (Select the best choice
below.)
A. Free cash flow increases by the amount of the interest expense.
B. Free cash flow decreases by the amount of the interest expense.
C. Free cash flow is not affected by interest expense.
D. None of the above.
Chapter 14 Solutions
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Ch. 14.A - Prob. 1QTDCh. 14.A - Prob. 2QTDCh. 14.A - Prob. 3QTDCh. 14.A - Prob. 2PCh. 14.A - Prob. 3PCh. 14.A - Prob. 4PCh. 14.A - Prob. 5PCh. 14.A - Prob. 6PCh. 14.A - Prob. 7PCh. 14.A - Prob. 8P
Ch. 14 - Prob. 1QTDCh. 14 - Prob. 2QTDCh. 14 - Prob. 3QTDCh. 14 - Prob. 4QTDCh. 14 - Prob. 5QTDCh. 14 - Prob. 6QTDCh. 14 - Prob. 7QTDCh. 14 - Prob. 8QTDCh. 14 - Prob. 9QTDCh. 14 - Prob. 10QTDCh. 14 - Prob. 11QTDCh. 14 - Prob. 1PCh. 14 - Prob. 2PCh. 14 - Prob. 3PCh. 14 - Prob. 4PCh. 14 - Prob. 5PCh. 14 - Prob. 6PCh. 14 - Prob. 7PCh. 14 - Prob. 8PCh. 14 - Prob. 9PCh. 14 - Prob. 10PCh. 14 - Prob. 11PCh. 14 - Prob. 12PCh. 14 - Prob. 13PCh. 14 - Prob. 14PCh. 14 - Prob. 15PCh. 14 - Prob. 16PCh. 14 - Prob. 17PCh. 14 - Prob. 18PCh. 14 - Prob. 19PCh. 14 - Prob. 20PCh. 14 - Prob. 21PCh. 14 - Prob. 22PCh. 14 - Prob. 23PCh. 14 - Prob. 24PCh. 14 - Prob. 25PCh. 14 - Prob. 26PCh. 14 - Prob. 27PCh. 14 - Prob. 28PCh. 14 - Prob. 29PCh. 14 - Prob. 30PCh. 14 - Prob. 31PCh. 14 - Prob. 32PCh. 14 - Prob. 33PCh. 14 - Prob. 34P
Knowledge Booster
Similar questions
- Express Industry’s expected net income for next year is $1.6 million. Its target, and current, capital structure is 30 percent debt and 70 percent common equity. The director of capital budgeting has determined that the optimal capital budget for next years is $2 million. Suppose Express uses the residual dividend policy to determine next year’s dividend. What is the expected dividend payout ratio? Can we use the residual dividend policy to set dividends on an annual basis? Explain why.arrow_forwardHappy Time Inc. is expected to generate the following cash flows for the next year, as shown in the table below. Happy Time now only has one outstanding debt with a face value of $110 million to be repaid in the next year. The current market value for the debt is $67 million. The tax rate is zero. If you invest in the corporate debt of Happy Time Inc. today, what is your expected percentage return on this investment? Cash flow in the next year Economy Probability Amount Boom 0.3 Normal 0.4 Recession 0.3 O 36.87% O -26.37% 64.8% O-16.63% $110 million $101 million $61 millionarrow_forwardWilde Software Development has an 11% unlevered cost of equity. Wwilde forecasts the following interest expenses, which are expected to grow at a constant 4% rate after Year 3. Wilde's tax rate is 25%. Year 1 Year 2 Year 3 Interest expenses $75 $110 $130 a. What is the horizon value of the interest tax shield? Do not round intermediate calculations. Round your answer to the nearest cent. b. What is the total value of the interest tax shield at Year 0? Do not round intermediate calculations. Round your answer to the nearest cent. $arrow_forward
- Marpor Industries has no debt and expects to generate free cash flows of $16.82 million each year. Marpor believes that if it permanently increases its level of debt to $35.60 million, the risk of financial distress may cause it to lose some customers and receive less favourable terms from its suppliers. As a result, Marpor's expected free cash flows with debt will be only $15.32 million per year. Suppose Marpor's tax rate is 25%, the risk-free rate is 6%, the expected return of the market is 12%, and the beta of Marpor's free cash flows is 1.10 (with or without leverage). a. Estimate Marpor's value without leverage. b. Estimate Marpor's value with the new leverage.arrow_forwardThe finance staff at Millcreek Company have constructed a forecast of the company’s net income.The chief executive officer (CEO) of Millcreek wonders why the forecast of next year’s interestexpense is the same as this year’s interest expense, whereas next year’s sales are expected toincrease by 20% over this year’s sales. What is the most likely explanation?a) Millcreek is expected to be more aggressive at minimizing its income tax expense next yearb) Millcreek expects its operating expenses to increase by 20% next year, the same as the expectedincrease in salesc) Millcreek is not expected to obtain any new loans next year, not repay any old loansd) Millcreek expects its operating expenses to increase by more than 20% increase in salesexpected next yeararrow_forwardFor the next fiscal year, you forecast net income of $48,700 and ending assets of $506,100. Your firm's payout ratio is 10.1%. Your beginning stockholders' equity is $295,600 and your beginning total liabilities are $119,300. Your non-debt liabilities such as accounts payable are forecasted to increase by $10,500. What is your net new financing needed for next year? The Tax Cuts and Jobs Act of 2017 temporarily allowed 100% bonus depreciation (effectively expensing capital expenditures). However, we will still include depreciation forecasting in this chapter and in these problems. The net financing required will be $ (Round to the nearest dollar.)arrow_forward
- Happy Time Inc. is expected to generate the following cash flows for the next year, as shown in the table below. Happy Time now only has one outstanding debt with a face value of $110 million to be repaid in the next year. The current market value for the debt is $67 million. The tax rate is zero. If the firm is financed by common equity and debt, what is the expected value of common equity next year? Cash flow in the next year Probability Amount Economy Boom 0.3 $110 million Normal 0.4 $101 million Recession 0.3 $61 million $26.8 million $24.7 million $0 -$18.3 millionarrow_forwardYour company faces a 30% tax rate and has $264 million in assets, currently financed entirely with equity. Equity is worth $9.40 per share, and a book value of equity is equal to the market value of equity. Also, let's assume that the firm's expected values for EBIT depend upon which state of the economy occurs this year, with the possible values of EBIT and their associated probabilities as shown below: State Pessimistic Optimistic Probability of State .30 .70 Expect EBIT in State $11.4 million $51.4 million The firm is considering switching to a 25-percent debt capital structure, and has determined that they would have to pay a 11 percent yield on perpetual debt in either event. What will be the level of expected EPS if they switch to the proposed capital structure? (Round your intermediate calculations and final answer to 2 decimal places, except calculation of number of shares which should be rounded to nearest whole number.)arrow_forwardStrategic system Inc. expects to have net income of 800000 during the next year. Its target and current capital structure are 40 percent debt and 60 percent equity. The director of capital budgeting has determined that the optimal capital budget for next year is 1.2 million. If strategic uses residual dividend model to determine next year dividend payout. What is the expected payout ratio?arrow_forward
- Management would like to achieve a target profit after taxes of $300,000. The company’s income tax rate is 25 percent. What target profit before taxes is required to achieve the $300,000 after-tax?arrow_forwardWilde Software Development has a 12% unlevered cost of equity. Wilde forecasts the following interest expenses, which are expected to grow at a constant 4% rate after Year 3. Wilde's tax rate is 25 % . Year 1 Year 2 Year 3 Interest expenses $85 $105 $135 What is the horizon value of the interest tax shield? Do not round intermediate calculations. Round your answer to the nearest cent. $ What is the total value of the interest tax shield at Year 0? Do not round intermediate calculations. Round your answer to the nearest cent. $arrow_forwardSambonoza Enterprises projects its sales next year to be $4 million and expects to earn 5 percent of that amount after taxes. The firm is currently in the process of projecting its financing needs and has made the following assumptions (projections): 1. Current assets will equal 20 percent of sales, and fixed assets will remain at their current level of $1 million. 2. Common equity is currently $0.8 million, and the firm pays out half its after-tax earnings in dividends. 3. The firm has short-term payables and trade credit that normally equal 10 percent of sales, and it has no long- term debt outstanding. What are Sambonoza's financing requirements (i.e., total assets) and discretionary financing needs (DFN) for the coming year?arrow_forward
arrow_back_ios
arrow_forward_ios
Recommended textbooks for you
EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:9781337514835
Author:MOYER
Publisher:CENGAGE LEARNING - CONSIGNMENT