What is the new EPS and DFL for both normal rain and drought

Assignment Help Accounting Basics
Reference no: EM133117417

Question - The StayDry Umbrella Corporation will have an EBIT of $100,000 if there is a normal amount of rain this year. But if there is a drought, they will have an EBIT of only $50,000. The interest rate on debt is 10%, and the tax rate is 35%. The company does not pay any preferred dividends.

1. If StayDry has zero debt and 50,000 outstanding shares, what will its EPS (earnings per share) be if there is normal rain? What will its EPS be if there is a drought? What is its DFL (degree of financial leverage)?

2. Now suppose StayDry has decided to take on $300,000 in debt and has used these funds to buy back half of the outstanding shares so now there are only 25,000 outstanding shares. What is the new EPS and DFL for both normal rain and drought?

3. Based on your answers to a) and b) above, what are the trade-offs management has to make between zero debt or $300,000 in debt? What are the benefits and disadvantages of taking on this debt?

Reference no: EM133117417

Questions Cloud

What would be the carrying value of trademark on December : Using straight-line method for amortization expense, what would be the carrying value of the trademark on December 31, year 20x2
How much cash will increase during the month of March : Depreciation Expense is $48,000. Use this information to determine how much cash will increase (decrease) during the month of March
Determine number board feet of lumber : Towson expects that 1,700 and 1,650 book cases will be built in June and July, respectively. Determine number board feet of lumber
What is the value of the Shelbie stock received by Jacob : They exchange their stock in Rhodes for their proportionate shares of the Shelbie stock and cash. What is the value of the Shelbie stock received by Jacob
What is the new EPS and DFL for both normal rain and drought : Now suppose StayDry has decided to take on $300,000 in debt. What is the new EPS and DFL for both normal rain and drought
What is the next years return on the bond you are holding : Suppose you are holding a 5 percent coupon bond maturing in thirty years with a yield to maturity of 15 percent. If the interest rate on thirty-year bonds rises
Explaining returns of mutual funds : In this problem you will construct a "global leverage" factor. Assume you believe that history will repeat itself, and "expected" will be similar to historical
Where should you buy your television : However, because of a computer glitch Best Buy is unable to accept Visa today. Where should you buy your television
Explain the liquidity management : Liquidity management is critical for financial institutions (or any other organizations) to meet their financial obligations. Liquidity risk arises when the org

Reviews

Write a Review

Accounting Basics Questions & Answers

  Prepare the journal entry on October

Prepare the journal entry on October 31, 2016, to record the first interest payment and the amortization of the premium/discount

  Prepare a multiple-step income statement for the year ended

Prepare a multiple-step income statement for the year ended December 31, 2014. Compute the gross margin percentage and net profit margin ratio

  Prepare journal entries to record the transactions above

The patent was acquired in January 2015 and has a useful life of 10 years. The franchise was acquired in January 2012 and also has a useful life of 10 years. Prepare journal entries to record the transactions above

  Justifying the firm survival

You should justify your choices in terms of the chosen industry/sector on the grounds of innovation, competitive advantage and, company's sustained growth and survival. Your budged is £150,000 (BP).

  Calculate taylors ending inventory for 2011

On January 1, 2011, the Taylor Company adopted the dollar-value LIFO method. The inventory value for its one inventory pool on this date was $400,000. Inventory data for 2011 through 2013 are as follows:

  Prepare necessary journal entries in the books of xyz ltd

Prepare and determine Pass the necessary journal entries in the books of XYZ Ltd. and also show the Balance sheet. XYZ Ltd. issued 1, 50,000 equity shares

  A supplementary payroll sheet that lists

Adams, Inc., pays its employees' weekly wages in cash. A supplementary payroll sheet that lists the employees' names and their earnings for a certain week is shown below.

  Which rules of professional conduct should ryan consider

Which rules of professional conduct should Ryan consider in deciding on a course of action? Explain. What are Ryan's ethical obligations in this matter

  Does the buyer Gonzales qualify for the discount

Determine if Gonzales, the buyer, qualifies for a cash discount, and who pays for shipping, Gonzales or Coleman. Does the buyer Gonzales qualify for discount

  How much will bill need to save for one-year tuition

He will graduate from high school in five years. Roughly how much will Bill need to save for one-year's tuition to account for an annual rate of inflation of 3%

  What is the nature of this lease to brecker company

Brecker Company's incremental borrowing rate is 12% a year (1% a month). Emporia's implicit rate is unknown.

  Calculate volume of sale require to achieve operating profit

Calculate the volume of sales required to achieve an operating profit of R20 000. Would you recommend an advertising programme costing

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd