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.
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.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Vijay
![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.
I
Earnings per share
b. Compute earnings per share under the Silverman plan.
Note: Round your answer to 2 decimal places.
Earnings per share](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F0c6f7406-da45-4b32-8961-29287e4d4988%2Fc2589168-e5b4-419d-a9fe-d9bd1d281d52%2Fcwrukgw_processed.jpeg&w=3840&q=75)
Transcribed Image Text: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.
I
Earnings per share
b. Compute earnings per share under the Silverman plan.
Note: Round your answer to 2 decimal places.
Earnings per share
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