Glen Furniture Case Study Figure 1 Earnings per share for the last five years Year 1 st Quarter 2 nd Quarter 3 rd Quarter 4 th 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 Required 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 Need questions 1 8 answered

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Glen Furniture Case Study Figure 1 Earnings per share for the last five years Year 1 st Quarter 2 nd Quarter 3 rd Quarter 4

Glen Furniture Case Study

Figure 1	Earnings per share for the last five years
Year	1^stQuarter	2^ndQuarter	3^rdQuarter	4^thQuarter	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

Required

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.

Need questions 1-8 answered.