Foundations Of Financial Management

Stanley B. Block, Geoffrey A. Hirt, Bartley Danielsen

Business Studies

16th Edition 路 768 pages

ISBN: 9781259277160

Chapter 2: 16BP_a (page 149)

Lenow鈥檚 Drug Stores and Hall鈥檚 Pharmaceuticals are competitors in the discount drug chain store business. The separate capital structures for Lenow and Hall are presented here:
Lenow
Hall
Debt @ 10%
$100,000
Debt @ 10%
$200,000
Common stock, $10 par
200,000
Common stock, $10 par
100,000
Total
$300,000
Total
$300,000
Shares
20,000
Common shares
10,000
a. Compute earnings per share if earnings before interest and taxes are $20,000, $30,000, and $120,000 (assume a 30 percent tax rate).

Short Answer

Expert verified

The EPS of Lenow at EBIT $20,000, $30,000 and $120,000 is 0.35, 0.70 and 3.85 respectively. And, the EPS of Hall at EBIT $20,000, $30,000 anf $120,000 is 0, 0.70 and 7 respectively.

Step by step solution

Calculation of earning per share of Lenow

Earning before interest and taxes	$20,000	$30,000	$120,000
Less: Interest ($100,000 x 10%)	10,000	10,000	10,000
Earning before tax	$10,000	$20,000	$110,000
Tax @ 30%	3,000	6,000	33,000
Earning after tax	$7,000	$14,000	$77,000
Number of shares	20,000	20,000	20,000
EPS (EAT/No. of shares)	0.35	0.70	3.85

Calculation of earning per share of Hall

Earning before interest and taxes	$20,000	$30,000	$120,000
Less: Interest ($200,000 x 10%)	20,000	20,000	20,000
Earning before tax	$0	$10,000	$100,000
Tax @ 30%	0	3,000	30,000
Earning after tax	$0	$7,000	$70,000
Number of shares	10,000	10,000	10,000
EPS (EAT/No. of shares)	0	0.70	7

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Cash	\)163,000
Accounts receivable	889,000
Inventory	411,000
New plant and equipment	520,000
Total assets	$1,983,000

Income statement
Sales	\(250,000
Expenses	192,000
Earnings before interest and taxes	\)58,000
Interest	7,500
Earnings before taxes	\(50,500
Taxes	15,500
Earning after taxes	\)35,000
Dividends	\(7,000

BALANCE SHEET
Assets		Liabilities and Stockholder鈥檚 equity
Cash	\)8,500	Accounts payable	\(26,400
Accounts receivable	63,000	Accrued wages	2,350
Inventory	91,000	Accrued taxes	3,750
Current assets	\)162,500	Current liabilities	\(32,500
Fixed assets	85,000	Notes payable	7,500
		Long term debts	17,500
		Common stock	125,000
		Retained earnings	65,000
Total assets	\)247,500	Total liabilities and stockholder鈥檚 equity	$247,500

Increase in accounts receivable	Decrease in prepaid expenses
Increase in notes payable	Increase in inventory
Depreciation expense	Dividend payment
Increase in investment	Increase in accrued expenses
Decrease in account payable

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Short Answer

Step by step solution

Calculation of earning per share of Lenow

Calculation of earning per share of Hall

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Lenow		Hall
Debt @ 10%	\(100,000	Debt @ 10%	\)200,000
Common stock, \(10 par	200,000	Common stock, \)10 par	100,000
Total	\(300,000	Total	\)300,000
Shares	20,000	Common shares	10,000