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Chapter 2: 18BP_d (page 149)

Sterling Optical and Royal Optical both make glass frames and each is able to generate earnings before interest and taxes of \(132,000. The separate capital structures for Sterling and Royal are shown here:

Sterling

Royal

Debt @12%

\)660,000

Debt @12%

\(220,000

Common stock, \)5 par

440,000

Common stock, \(5 par

880,000

Total

\)1,100,000

Total

$1,100,000

Common shares

88,000

Common shares

176,000

d. Based on the evidence in part c, should management be concerned only about the impact of financing plans on earnings per share, or should stockholders鈥� wealth maximization (stock price) be considered as well?

Short Answer

Expert verified

The EPS of both the companies are same, but the stock price of royal optical is more than the sterling optical. The management should not only consider the impact of financing plan on EPS, management should also consider the stock price of the company because it represents the wealth of the stockholder鈥檚.

Step by step solution

01

Financing plan

Financing plan is defined as the current money situation and the long term monetary objectives, as well as the strategies to achieve the objectives.

02

Stockholder’s wealth

The stockholder鈥檚 wealth means the aggregate wealth conferred on stockholders through their investment in the company. It is computed by multiplying the stockprice with the number of shares.The management of the company are concerned with both the financing plan impact on EPS and the stock price of the company.

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Most popular questions from this chapter

The Lancaster Corporation鈥檚 income statement is given below.

b. What would be the fixed-charge-coverage ratio?

Lancaster corporation

Sales

\(246,000

Cost of goods sold

122,000

Gross profit

\)124,000

Fixed charges (other than interest)

27,500

Income before interest and taxes

\(96,500

Interest

21,800

Income before taxes

\)74,700

Taxes (35%)

26,145

Income after taxes

$48,555

Using the income statement for Times Mirror and Glass Co., compute the following ratios:

The total assets for this company equal \(80,000. Set up the equation for the Du Pont system of ratio analysis, and compute c, d, and e.

d. Total assets turnover ratio.

Times mirror and glass company

Sales

\)126,000

Less: Cost of goods sold

93,000

Gross profit

\(33,000

Less: selling and administrative expenses

11,000

Lease Expenses

4,000

Operating profit*

\)18,000

Less: Interest expenses

3,000

Earning before taxes

\(15,000

Less: Taxes (30%)

4,500

Earning after taxes

\)10,500

*equal income before interest and taxes

In January 2007, the Status Quo Company was formed. Total assets were \(544,000, of which \)306,000 consisted of depreciable fixed assets. Status

Quo uses straight-line depreciation of \(30,600 per year, and in 2007 it estimated its fixed assets to have useful lives of 10 years. Aftertax income has been \)29,000 per year each of the last 10 years. Other assets have not changed since 2007.

a. Compute return on assets at year-end for 2007, 2009, 2012, 2014, and 2016.

(Use $29,000 in the numerator for each year.)

If we divide users of ratios into short-term lenders, long-term lenders, andstockholders,which ratios would each group be most interested in, and for

what reasons?

If the accounts receivable turnover ratio is decreasing, what will be happening to the average collection period?
See all solutions

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