Wingler Communications Corporation (WCC) produces airpods that sell for $28.60 per set, and this year's sales are expected to be 450,000 units. Variable production costs for the expected sales unde present production methods are estimated at $10,200,000, and fixed production (operating) costs a present are $1,560,000. WCC has $4,800,000 of debt outstanding at an interest rate of 9%. There are 240,000 shares of common stock outstanding, and there is no preferred stock. The dividend payout ratio is 70%, and WCC is in the 25% federal-plus-state tax bracket. WCC is a small company with average sales of $25 million or less during the past 3 years, so it is exempt from the interest deduction limitation. The company is considering investing $7,200,000 in new equipment. Sales would not increase, but variable costs per unit would decline by 20%. Also, fixed operating costs would increase from $1,560,000 to $1,800,000. WCC could raise the required capital by borrowing $7,200,000 at 10% or by selling 240,000 additional shares of common stock at $30 per share. a. What would be WCC's EPS (1) under the old production process, (2) under the new process if it uses debt, and (3) under the new process if it uses common stock? Do not round intermediate calculations. Round your answers to the nearest cent. 1. $
Wingler Communications Corporation (WCC) produces airpods that sell for $28.60 per set, and this year's sales are expected to be 450,000 units. Variable production costs for the expected sales unde present production methods are estimated at $10,200,000, and fixed production (operating) costs a present are $1,560,000. WCC has $4,800,000 of debt outstanding at an interest rate of 9%. There are 240,000 shares of common stock outstanding, and there is no preferred stock. The dividend payout ratio is 70%, and WCC is in the 25% federal-plus-state tax bracket. WCC is a small company with average sales of $25 million or less during the past 3 years, so it is exempt from the interest deduction limitation. The company is considering investing $7,200,000 in new equipment. Sales would not increase, but variable costs per unit would decline by 20%. Also, fixed operating costs would increase from $1,560,000 to $1,800,000. WCC could raise the required capital by borrowing $7,200,000 at 10% or by selling 240,000 additional shares of common stock at $30 per share. a. What would be WCC's EPS (1) under the old production process, (2) under the new process if it uses debt, and (3) under the new process if it uses common stock? Do not round intermediate calculations. Round your answers to the nearest cent. 1. $
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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Question
![Wingler Communications Corporation (WCC) produces airpods that sell for $28.60 per set, and this
year's sales are expected to be 450,000 units. Variable production costs for the expected sales under
present production methods are estimated at $10,200,000, and fixed production (operating) costs at
present are $1,560,000. WCC has $4,800,000 of debt outstanding at an interest rate of 9%. There
are 240,000 shares of common stock outstanding, and there is no preferred stock. The dividend
payout ratio is 70%, and WCC is in the 25% federal-plus-state tax bracket. WCC is a small company
with average sales of $25 million or less during the past 3 years, so it is exempt from the interest
deduction limitation.
The company is considering investing $7,200,000 in new equipment. Sales would not increase, but
variable costs per unit would decline by 20%. Also, fixed operating costs would increase from
$1,560,000 to $1,800,000. WCC could raise the required capital by borrowing $7,200,000 at 10% or
by selling 240,000 additional shares of common stock at $30 per share.
a. What would be WCC's EPS (1) under the old production process, (2) under the new process if it
uses debt, and (3) under the new process if it uses common stock? Do not round intermediate
calculations. Round your answers to the nearest cent.
2. $
3. $
b. At what unit sales level would WCC have the same EPS assuming it undertakes the investment
and finances it with debt or with stock? (Hint: V = variable cost per unit = $8,160,000/450,000,
and EPS = [(PQVQ - F - I)(1 - T)]/N. Set EPS Stock = EPS Debt and solve for Q.) Do not round
intermediate calculations. Round your answer to the nearest whole number.
units](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F9336b0a8-199d-485e-9442-5d0fe1f82213%2F7eab02a4-2b44-4a53-a8ca-ff20d12e3954%2Fee0x2ig_processed.jpeg&w=3840&q=75)
Transcribed Image Text:Wingler Communications Corporation (WCC) produces airpods that sell for $28.60 per set, and this
year's sales are expected to be 450,000 units. Variable production costs for the expected sales under
present production methods are estimated at $10,200,000, and fixed production (operating) costs at
present are $1,560,000. WCC has $4,800,000 of debt outstanding at an interest rate of 9%. There
are 240,000 shares of common stock outstanding, and there is no preferred stock. The dividend
payout ratio is 70%, and WCC is in the 25% federal-plus-state tax bracket. WCC is a small company
with average sales of $25 million or less during the past 3 years, so it is exempt from the interest
deduction limitation.
The company is considering investing $7,200,000 in new equipment. Sales would not increase, but
variable costs per unit would decline by 20%. Also, fixed operating costs would increase from
$1,560,000 to $1,800,000. WCC could raise the required capital by borrowing $7,200,000 at 10% or
by selling 240,000 additional shares of common stock at $30 per share.
a. What would be WCC's EPS (1) under the old production process, (2) under the new process if it
uses debt, and (3) under the new process if it uses common stock? Do not round intermediate
calculations. Round your answers to the nearest cent.
2. $
3. $
b. At what unit sales level would WCC have the same EPS assuming it undertakes the investment
and finances it with debt or with stock? (Hint: V = variable cost per unit = $8,160,000/450,000,
and EPS = [(PQVQ - F - I)(1 - T)]/N. Set EPS Stock = EPS Debt and solve for Q.) Do not round
intermediate calculations. Round your answer to the nearest whole number.
units
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