CONTEMP. FINANCIAL MGT.-W/MINDTAP V3
CONTEMP. FINANCIAL MGT.-W/MINDTAP V3
14th Edition
ISBN: 9780357292839
Author: MOYER
Publisher: CENGAGE L
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Chapter 14, Problem 1P

a.

Summary Introduction

To determine: Normal EPS and EPS when sales increases by 10%.

a.

Expert Solution
Check Mark

Explanation of Solution

Given information: Sales $6 million, Fixed costs $800,000, Variable cost ratio 0.75, loan $600,000, Interest on loan 10%, 20,000 preference share of $3 each and 60,000 common shares, income tax 40%

Calculation:

ParticularsAmount(old)Amount(new)
Sales$6,000,000$6,600,000
Less: Variable costs($4,500,000)($4,950,000)
Less: fixed operating costs($800,000)($800,000)
EBIT$700,000$850,000
Less: interest expense($60,000)($60,000)
EBT$640,000$790,000
Less: income tax (40%)($256,000)($316,000)
EAT$384,000$474,000
Less: preferred stock dividends($60,000)($60,000)
Earning (common stockholders)$324,000$414,000
EPS (60,000 shares)$5.40$6.90

b.

Summary Introduction

To determine: DOL (i) by definitional formula (ii) by computational formula

b.

Expert Solution
Check Mark

Explanation of Solution

Given information: Sales $6 million, Fixed costs $800,000, Variable cost ratio 0.75, loan $600,000, Interest on loan 10%, 20,000 preference share of $3 each and 60,000 common shares, income tax 40%

Calculation:

  1. i. DOL at "X"=ΔEBITEBIT/ΔSalesSales

    Substituting $6,000,000 as “X”, $150,000 as ∆EBIT, $700,000 as EBIT, $600,000 as ∆Sales and $6,000,000 as Sales in the equation:

    DOL at $6,000,000=$150,000$700,000/$600,000$6,000,000=2.143

  2. ii. DOL at "X"=SalesVariable costEBIT

    Substituting $6,000,000 as “X”, $6,000,000 as Sales, $4,500,000 as variable cost and $700,000 as EBIT in the equation:

    DOL at $6,000,000=$6,000,000$4,500,000$700,000=2.143

  3. iii. There is a change of 2.143 percent in EBIT for a one percent change in sales for given sales of $6,000,000 in the same direction.

c.

Summary Introduction

To determine: DFL (i) by definitional formula (ii) by computational formula

c.

Expert Solution
Check Mark

Explanation of Solution

Given information: Sales $6 million, Fixed costs $800,000, Variable cost ratio 0.75, loan $600,000, Interest on loan 10%, 20,000 preference share of $3 each and 60,000 common shares, income tax 40%

Calculation:

CONTEMP. FINANCIAL MGT.-W/MINDTAP V3, Chapter 14, Problem 1P

Substituting $700,000 as “X”, $1.50 as ∆EPS, $5.40 as EPS, $150,000 as ∆EBIT and $700,000 as EBIT in the equation

DFL at $700,000=$1.50$5.40/$150,000$700,000=1.2963

  1. i. DFL at "X"=EBITEBIT-I-Dp/11-T

    Substituting $700,000 as “X”, $700,000 as EBIT, $60,000 as I, $60,000 as Dp and 4 as T in the equation

    DFL at $700,000=$700,000$700,000-$60,000-$60,000/11-4=1.2963

  2. ii. There is a change of 1,2963 percent in EPS for a one percent change in EBIT for given EBIT of $700,000 in the same direction.

d.

Summary Introduction

To determine: DCL (i) by definitional formula (ii) by computational formula

d.

Expert Solution
Check Mark

Explanation of Solution

Given information: Sales $6 million, Fixed costs $800,000, Variable cost ratio 0.75, loan $600,000, Interest on loan 10%, 20,000 preference shares of $3 each and 60,000 common shares, income tax 40%

Calculation:

  1. i. DCL =ΔEPSEPS/ΔSalesSales

Substituting $1.50 as ∆EPS, $5.40 as EPS, $600,000 as ∆Sales and $6,000,000 as Sales in the equation

DCL =$1.50$5.40/$600,000$6,000,000=2.778

  1. ii. DCL =SalesVariable costEBIT-I-Dp/11T

    Substituting $6,000,000 as sales, $ 4,500,000 as variable cost, $700,000 as EBIT, $60,000 as I, $60,000 as Dp and 4 as T in the equation.

    DCL =$6,000,000$4,500,000$700,000-$60,000-$60,000/114=2.778

  2. iii. DCL =DOL×DFL

    Substituting 2.143 as DOL and 1.2963 as DFL in the equation

    DCL =2.143×1.2963=2.778

  3. iv. There is a change of 2.778 percent in EPS for one percent change in sale for given sales of $6,000,000 in the same direction.

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