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Chapter 2: 20BP_d (page 150)

Sinclair Manufacturing and Boswell Brothers Inc. are both involved in the production of brick for the homebuilding industry. Their financial information is as follows:

Capital Structure

Sinclair

Boswell

Deb @11%

\(900,000

0

Common stock, \)10 per share

600,000

\(1,500,000

Total

\)1,500,000

\(1,500,000

Common shares

60,000

150,000

Operating plans

Sales (55,000 units at \)20 each)

\(1,100,000

\)1,100,000

Less: variable cost

880,000

(\(16 per unit)

550,000

(\)10 per unit)

Fixed cost

0

305,000

Earnings before interest and taxes (EBIT)

\(220,000

\)245,000

d. In part b, if sales double, by what percentage will EPS increase?

Short Answer

Expert verified

When the sales double in part b, then the EPS of the company also doubled. It increases by 100%.

Step by step solution

01

Number of shares

Numberofshares=SharecapitalPricepershare=$1,500,00010=150,000

02

Earning per share

Particulars

Amount after sales double

Amount before sales double

Sales (55,000 x $20) x2

$2,200,000

$1,100,000

Less: Variable cost (55,000 x $16) x 2

1,760,000

880,000

Operating income

$440,000

$220,000

Less: Fixed cost

0

0

Less: Interest cost of Boswell

0

0

Earning before tax (EBT)

$440,000

$220,000

Less: taxes

0

0

Earning after tax

$440,000

$220,000

No. of shares

150,000

150,000

EPS

2.93

1.46

03

% increase in EPS

%increaseinEPS=EPSaftersalesdouble-EPSbeforesalesdoubleEPSbeforesalesdouble脳1=$2.93-$1.46$1.46脳100=100%

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Most popular questions from this chapter

Landers Nursery and Garden Stores has current assets of \(220,000 and fixed assets of \)170,000. Current liabilities are \(80,000 and long-term liabilities are \)140,000. There is $40,000 in preferred stock outstanding and the firm has

issued 25,000 shares of common stock. Compute book value (net worth)

per share.

Arrange the following items in proper balance sheet presentation:

Accumulated depreciation

\(309,000

Retained earnings

187,000

Cash

14,000

Bonds payable

136,000

Accounts receivable

54,000

Plant and equipment 鈥� original cost

775,000

Accounts payable

35,000

Allowance for bad debts

9,000

Common stock, \)1 par, 100,000 share outstanding

100,000

Inventory

70,000

Preferred stock, $59 par, 1,000 share outstanding

59,000

Marketable securities

24,000

Investments

20,000

Notes payable

34,000

Capital paid in excess of par (common stock)

88,000

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.

e. Return on assets (investment).

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

Why is interest expense said to cost the firm substantially less than the actual expense, while dividends cost it 100 percent of the outlay?

For December 31, 20X1, the balance sheet of Baxter Corporation was as follows:

Current assets

Liabilities

Cash

\(15,000

Accounts payable

\)17,000

Accounts receivable

20,000

Notes payable

25,000

Inventory

30,000

Bonds payable

55,000

Prepaid expenses

12,500

Fixed assets

Stockholder鈥檚 equity

Plant and equipment (gross)

Less: accumulated depreciation

\(255,000

51,000

Preferred stock

\)25,000

Net plant and equipment

\(204,000

Common stock

60,000

Paid in capital

30,000

Retained earnings

69,500

Total assets

\)281,500

Total liabilities and stockholder鈥檚 equity

\(281,500

Sales for 20X2 were \)245,000, and the cost of goods sold was 60 percent of sales. Selling and administrative expense was \(24,500. Depreciation expense was 8 percent of plant and equipment (gross) at the beginning of the year. Interest expense for the notes payable was 10 percent, while the interest rate on the bonds payable was 12 percent. This interest expense is based on December 31, 20X1 balances. The tax rate averaged 20 percent.

\)2,500 in preferred stock dividends were paid, and \(5,500 in dividends were paid to common stockholders. There were 10,000 shares of common stock outstanding.

During 20X2, the cash balance and prepaid expenses balances were

unchanged. Accounts receivable and inventory increased by 10 percent. A new machine was purchased on December 31, 20X2, at a cost of \)40,000. Accounts payable increased by 20 percent. Notes payable increased by \(6,500 and bonds payable decreased by \)12,500, both at the end of the year. The preferred stock, common stock, and paid-in capital in excess of par accounts did not change.

a. Prepare an income statement for 20X2.
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