Zain glassware has made the forecast of sales shown in the following table. Also given is the probability of each level of sales. Sales Probability Rs. 200,000 .20 300,000 .60 400,000 .20 The firm has fixed operating costs of Rs. 75,000 and variable operating costs equal to the 70% level of sales. The company pays Rs. 12,000 in interest per period. The tax rate is 40%. Compute the earnings before interest and taxes (EBIT) for each level of sales. Compute the earnings per share (EPS) for each level of sales, the expected EPS, the standard deviation of the EPS and the coefficient of variation of EPS, assuming that there are 10,000 shares of common stock outstanding. Zain glassware has the opportunity to reduce its leverage to zero and pay no interest. This will require that the number of shares of common stock outstanding be increased to 15,000. Repeat (b) under this assumption.
Zain glassware has made the forecast of sales shown in the following table. Also given is the probability of each level of sales. Sales Probability Rs. 200,000 .20 300,000 .60 400,000 .20 The firm has fixed operating costs of Rs. 75,000 and variable operating costs equal to the 70% level of sales. The company pays Rs. 12,000 in interest per period. The tax rate is 40%. Compute the earnings before interest and taxes (EBIT) for each level of sales. Compute the earnings per share (EPS) for each level of sales, the expected EPS, the standard deviation of the EPS and the coefficient of variation of EPS, assuming that there are 10,000 shares of common stock outstanding. Zain glassware has the opportunity to reduce its leverage to zero and pay no interest. This will require that the number of shares of common stock outstanding be increased to 15,000. Repeat (b) under this assumption.
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
Related questions
Question
100%
Zain glassware has made the
Sales |
Probability |
Rs. 200,000 |
.20 |
300,000 |
.60 |
400,000 |
.20 |
The firm has fixed operating costs of Rs. 75,000 and variable operating costs equal to the 70% level of sales. The company pays Rs. 12,000 in interest per period. The tax rate is 40%.
- Compute the earnings before interest and taxes (EBIT) for each level of sales.
- Compute the earnings per share (EPS) for each level of sales, the expected EPS, the standard deviation of the EPS and the coefficient of variation of EPS, assuming that there are 10,000 shares of common stock outstanding.
- Zain glassware has the opportunity to reduce its leverage to zero and pay no interest. This will require that the number of shares of common stock outstanding be increased to 15,000. Repeat (b) under this assumption.
Compare your findings in (b) and (c) and comment on the reduction of debt to zero on the firm’s financial risk.
Expert Solution
![](/static/compass_v2/shared-icons/check-mark.png)
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 7 steps with 3 images
![Blurred answer](/static/compass_v2/solution-images/blurred-answer.jpg)
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you
![Essentials Of Investments](https://compass-isbn-assets.s3.amazonaws.com/isbn_cover_images/9781260013924/9781260013924_smallCoverImage.jpg)
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
![FUNDAMENTALS OF CORPORATE FINANCE](https://www.bartleby.com/isbn_cover_images/9781260013962/9781260013962_smallCoverImage.gif)
![Financial Management: Theory & Practice](https://www.bartleby.com/isbn_cover_images/9781337909730/9781337909730_smallCoverImage.gif)
![Essentials Of Investments](https://compass-isbn-assets.s3.amazonaws.com/isbn_cover_images/9781260013924/9781260013924_smallCoverImage.jpg)
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
![FUNDAMENTALS OF CORPORATE FINANCE](https://www.bartleby.com/isbn_cover_images/9781260013962/9781260013962_smallCoverImage.gif)
![Financial Management: Theory & Practice](https://www.bartleby.com/isbn_cover_images/9781337909730/9781337909730_smallCoverImage.gif)
![Foundations Of Finance](https://www.bartleby.com/isbn_cover_images/9780134897264/9780134897264_smallCoverImage.gif)
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
![Fundamentals of Financial Management (MindTap Cou…](https://www.bartleby.com/isbn_cover_images/9781337395250/9781337395250_smallCoverImage.gif)
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
![Corporate Finance (The Mcgraw-hill/Irwin Series i…](https://www.bartleby.com/isbn_cover_images/9780077861759/9780077861759_smallCoverImage.gif)
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education