Compute earnings per share under the gold plan

Reference no: EM131787303

Question: Mr. Gold is in the widget business. He currently sells 1 million widgets a year at $5 each. His variable cost to produce the widgets is $3 per unit, and he has $1,500,000 in fixed costs. His sales-to-assets ratio is five times, and 40 percent of his assets are financed with 8 percent debt, with the balance financed by common stock at $10 par value per share. The tax rate is 40 percent. His brother-in-law, Mr. Silverman, says he is doing it all wrong. By reducing his price to $4.50 a widget, he could increase his volume of units sold by 40 percent. Fixed costs would remain constant, and variable costs would remain $3 per unit. His sales-to-assets ratio would be 6.3 times. Furthermore, he could increase his debt-to-assets ratio to 50 percent, with the balance in common stock. It is assumed that the interest rate would go up by 1 percent and the price of stock would remain constant.

a. Compute earnings per share under the Gold plan.

b. Compute earnings per share under the Silverman plan.

c. Mr. Gold's wife, the chief financial officer, does not think that fixed costs would remain constant under the Silverman plan but that they would go up by 15 percent. If this is the case, should Mr. Gold shift to the Silverman plan, based on earnings per share?

Reference no: EM131787303

Questions Cloud

Explain why for the payer station the part is short duration : The following appeared on a quote sheet: "Receiver Station: An option to receive the fixed leg of a swap (i.e., long receiver is long duration).

What is the degree of financial leverage : The Lopez-Portillo Company has $10 million in assets, 80 percent financed by debt and 20 percent financed by common stock.

Propose a strategy to mitigate impact this risk : Determine one specific hazard associated with one of these risk categories and propose a strategy to mitigate impact this risk could have on practice.

Plain vanilla or generic interest-rate swap : a. What is the risk with using a plain vanilla or generic interest-rate swap?

Compute earnings per share under the gold plan : Mr. Gold is in the widget business. He currently sells 1 million widgets a year at $5 each. His variable cost to produce the widgets is $3 per unit.

Do you think the standard deviation of the average runs : Do you think the standard deviation of the average runs scored by all players in a T-20 match would be larger or smaller than the standard deviation.

What is the semiannual fixed-rate payment : Assume that the swap in question a requires payments semiannually rather than quarterly. What is the semiannual fixed-rate payment?

Natural disaster or public health emergency : Determine the main functions of the practice that will need to remain operational before, during, and / or after a natural disaster or public health emergency.

Internal comparison of financial benchmarking : Compare and contrast the two (2) main levels (i.e., internal comparison and external comparison) of financial benchmarking.

User Account

All Pages