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Mr. Gold is in the widget business. He currently sells 1.1 million widgets a year at $5 each. His variable cost to produce the widgets
Mr. Gold is in the widget business. He currently sells 1.1 million widgets a year at $5 each. His variable cost to produce the widgets is $3 per unit, and he has $1,620,000 in fixed costs. His sales-to-assets ratio is five times, and 20 percent of his assets are financed with 12 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 $4.50 a widget, he could increase his volume of units sold by 40 percent. Fixed costs would remain constant, and variable costs would remain $3 per unit. His sales-to- assets ratio would be 6.3 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.) Earnings per share b. Compute earnings per share under the Silverman plan. (Round your answer to 2 decimal places.) Earnings per share Compute earnings per share under the Silverman plan. (Round your answer to 2 decimal places.) arnings per share Mr. Gold's wife, the chief financial officer, does not think that fixed costs would remain constant under the Silverman plan but that y would go up by 20 percent. If this is the case, should Mr. Gold shift to the Silverman plan, based on earnings per share? O No O Yes
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