Foundations of Financial Management
16th Edition
ISBN: 9781259277160
Author: Stanley B. Block, Geoffrey A. Hirt, Bartley Danielsen
Publisher: McGraw-Hill Education
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Textbook Question
Chapter 5, Problem 26P
Mr. Gold is in the widget business. He currently sells 1.5 million widgets a year at
35 percent.
His brother-in-law, Mr. Silverman, says he is doing it all wrong. By reducing his price to
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?
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Mr. Gold is in the widget business. He currently sells 1.9 million widgets a year at $6 each. His variable cost to produce the widgets is $4 per unit, and he has $1,590,000 in fixed costs. His sales-to-assets ratio is six times, and 30 percent of his assets are financed with 7 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 Mr. Gold is doing it all wrong. By reducing his price to $5.00 a widget, he could increase his volume of units sold by 40 percent. Fixed costs would remain constant, and variable costs would remain $4 per unit. His sales-to-assets ratio would be 7.0 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. (Round your answer to 2 decimal places.)…
John, 38, makes $125,000 per year. He has a 35 year old wife, Nancy, and a daughter who just turned 7. John’s share of the family’s consumption is 21%, and he pays an average tax rate of 28%. He plans to work another 30 years and expects salary increases equal to inflation, which he expects to be 3% annually. He expects to earn an 8% nominal rate of return on his investments.
3. Use the Capitalization of Earning method to determine John’s appropriate life insurance coverage (note: use FSE and the real interest rate).
Ms. Gold is in the widget business. She currently sells 1.4 million widgets a year at $5 each. Her variable cost to produce the widgets is $3 per unit, and she has $1,540,000 in fixed costs. Her sales-to-assets ratio is five times, and 20 percent of her assets are financed with 9 percent debt, with the balance financed by common stock at $10 par value per share. The tax rate is 40 percent.
Her sister-in-law, Ms. Silverman, says Ms. Gold is doing it all wrong. By reducing her price to $4.50 a widget, she could increase her volume of units sold by 50 percent. Fixed costs would remain constant, and variable costs would remain $3 per unit. Her sales-to-assets ratio would be 9.0 times. Furthermore, she could increase her 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.
Compute earnings per share under the Gold plan.
Note: Round your answer to 2 decimal places.…
Chapter 5 Solutions
Foundations of Financial Management
Ch. 5 - Discuss the various uses for break-even analysis....Ch. 5 - What factors would cause a difference in the use...Ch. 5 - Explain how the break-even point and operating...Ch. 5 - Prob. 4DQCh. 5 - What does risk taking have to do with the use of...Ch. 5 - Discuss the limitations of financial leverage....Ch. 5 - Prob. 7DQCh. 5 - Explain how combined leverage brings together...Ch. 5 - Explain why operating leverage decreases as a...Ch. 5 - Prob. 10DQ
Ch. 5 - Prob. 1PCh. 5 - Prob. 2PCh. 5 - Prob. 3PCh. 5 - Draw two break-even graphs-one for a conservative...Ch. 5 - Prob. 5PCh. 5 - Shawn Pen & Pencil Sets Inc. has fixed costs of ....Ch. 5 - Calloway Cab Company determines its break-even...Ch. 5 - Prob. 8PCh. 5 - Boise Timber Co. computes its break-even point...Ch. 5 - The Sterling Tire Company’s income statement for...Ch. 5 - Prob. 11PCh. 5 - Healthy Foods Inc. sells 50-pound bags of grapes...Ch. 5 - United Snack Company sells 50-pound bags of...Ch. 5 - Prob. 14PCh. 5 - Prob. 15PCh. 5 - Lenow’s Drug Stores and Hall’s Pharmaceuticals...Ch. 5 - The capital structure for Cain Supplies is...Ch. 5 - Sterling Optical and Royal Optical both make glass...Ch. 5 - Prob. 19PCh. 5 - Sinclair Manufacturing and Boswell Brothers Inc....Ch. 5 - DeSoto Tools Inc. is planning to expand...Ch. 5 - Prob. 23PCh. 5 - Prob. 24PCh. 5 - Prob. 25PCh. 5 - Mr. Gold is in the widget business. He currently...Ch. 5 - Delsing Canning Company is considering an...Ch. 5 - Prob. 2WECh. 5 - Prob. 3WECh. 5 - Prob. 4WECh. 5 - Prob. 5WE
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