| 1. Project earnings per share for 2016 assuming that sales increase by $500,000. Use Figure 3 as the model for the calculation. Further assume that the capital structure is not changed. 2. By what percent did earnings per share increase from 2015 to 2016? 3. Now assume that $10 million of debt replaces 625,000 shares of common stock as described in the case. The interest on the new debt will be 11.25 percent. What will projected earnings per share be for 2016 based on the anticipated sales increase of $500,000? 4. Based on your answer to question 3, by what percent would earnings per share increase from 2015 to 2016? 5. Compute the degree of financial leverage (DFL) for the answer to question 1 and for the answer to question 3. 6. Using the formula in footnote 3 of Chapter 5, compute degree of combined leverage (DCL) for the answer to question 1 and the answer to question 3. 7. What is the total debt to assets ratio as shown in the 2015 balance sheet (Figure 2)? What will it be if $10 million worth of stockholders equity is replaced with debt? 8. What do you think might happen to the stock price as a result of replacing $10 million worth of stockholders equity with debt? Consider any relevant factors. | | Figure 1 | Earnings per share for the last five years | | | Year | 1st Quarter | 2nd Quarter | 3rd Quarter | 4th Quarter | Yearly Total | | | | 2011.................................................................................................... | $.23 | $.25 | $.19 | $.34 | $1.01 | | | 2012.................................................................................................... | ?.26 | ?.28 | ?.27 | ?.41 | ?1.22 | | | 2013.................................................................................................... | ?.34 | ?.36 | ?.33 | ?.48 | ?1.51 | | | 2014.................................................................................................... | ?.35 | ?.37 | ?.34 | ?.49 | ?1.55 | | | 2015.................................................................................................... | ?.35 | ?.36 | ?.36 | ?.49 | ?1.56 | | | | | | | | | | | | | | | | | | | | | | | Figure 2 | | | GLEN MOUNT FURNITURE COMPANY | | Balance Sheet | | December 31, 2015 | | Assets | | Current assets: | | | | ??Cash............................................................................................. | | $???350,000 | | ??Marketable securities..................................................................... | | 90,000 | | ??Accounts receivable....................................................................... | | 5,000,000 | | ??Inventory...................................................................................... | | ??7,000,000 | | ????Total current assets.................................................................... | | ?12,440,000 | | Other Assets: | | | | ??Investments.................................................................................. | | 5,000,000 | | Fixed Assets | | | | ??Plant and equipment...................................................................... | 27,060,000 | | | ????Less: Accumulated depreciation.................................................. | ?4,000,000 | | | ??Net plant and equipment................................................................ | | 23,060,000 | | Total assets....................................................................................... | | $ 40,500,000 | | | | | | | Liabilities and Stockholders Equity | | Current liabilities:................................................................ | | | | ??Accounts payable............................................................. | | $?4,400,000 | | ??Wages payable................................................................. | | 150,000 | | ??Accrued expenses............................................................. | | ???950,000 | | ????Total current liabilities.................................................. | | 5,500,000 | | Long-term liabilities............................................................. | | | | ??Bonds payable, 10.625%................................................... | | 12,000,000 | | Stockholders equity............................................................. | | | | ??Common stock, $1 par value, 2,000,000 shares................... | | 2,000,000 | | ??Capital in excess of par..................................................... | | 8,000,000 | | ??Retained earnings............................................................. | | ?13,000,000 | | ????Total stockholders equity.............................................. | | ?23,000,000 | | Total liabilities and stockholders equity................................ | | ?40,500,000 | | Figure 3 | | GLEN MOUNT FURNITURE COMPANY | | Abbreviated Income Statement | | For the Year Ended December 31, 2015 | | Sales.................... | $45,000,000 | | Less: Fixed Costs.. | 12,900,000 | | Less: Variable Costs (58% of sales)...................................................... | 26,100,000 | | Operating income (EBIT)..................................................................... | $ 6,000,000 | | Less: Interest........ | ?1,275,000 | | Earnings before taxes (EBT)................................................................. | $ 4,725,000 | | Less: Taxes (34%). | ?1,606,500 | | Earnings after taxes (EAT)................................................................... | $ 3,118,500 | | Shares.................. | 2,000,000 | | Earnings per share. | $ 1.56 | | | |
