Compute the earnings before interest and taxes

Assignment Help Financial Management

Reference no: EM132028787

Debt and financial risk - Tower Interiors has made the forecast of sales shown in the following table. Also given is the probability of each level of sales.

Sales - 210000, 310000, 410000 Probability - .20, .65, .15

The firm has fixed operating costs of $ 76,000 and variable operating costs equal to 60% of the sales level. The company pays $12,600 in interest per period. The tax rate is 40%.

a. Compute the earnings before interest and taxes (EBIT) for each level of sales.

b. Compute the earnings per share (EPS) for each level of sales, the expected EPS, the standard deviation of the? EPS and the coefficient of variation of EPS, assuming that there are 10,700 shares of common stock outstanding.

c. Tower has the opportunity to reduce its leverage to zero and pay no interest. This will require that the number of shares outstanding be increased to 16,050. Repeat part (b) under this assumption.

d. Compare your findings in parts (b) and (c), and comment on the effect of the reduction of debt to zero on the firm's financial risk.

Reference no: EM132028787

Questions Cloud

Appropriate capital budgeting decision is to reject project : Given this information, the appropriate capital budgeting decision is to reject Project A and choose Project B. True False

Difference between fund manager and ordinary investor : The difference between a fund manager and ordinary investor.

Budget preparation-what is the incremental analysis : Budget Preparation: The Lees believe that production and sales could double after being on Shark Tank which is scheduled. What is the incremental analysis.

Small and value stocks are fairly priced : What theories/models may justify that small and value stocks are fairly priced?

Compute the earnings before interest and taxes : Compute the earnings before interest and taxes (EBIT) for each level of sales.

Considering purchasing new production tool : You are considering purchasing a new production tool that will cost $50,000 to purchase today.

Machine screws annually for automobile production : Consider a project to supply Detroit with 20,000 tons of machine screws annually for automobile production.

Calculate the internal rate of return for a machine : Calculate the internal rate of return for a machine that costs $500,000 and provides annual revenue of $115,000 per year for 5 years.

What is the projected amount of fixed costs : The selling price is $37 a unit, the variable cost per unit is $22, and depreciation is $18,000. What is the projected amount of fixed costs?

User Account

All Pages