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
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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![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
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%2F1859cd6d-dfa0-430a-ad8d-209e2cb60ffb%2Fa1e84b8a-0245-4384-b26e-040f4d26b72f%2Fqfwmicq_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.
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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