Answered step by step
Verified Expert Solution
Link Copied!

Question

00
1 Approved Answer

Ms . Gold is in the widget business. She currently sells 1 . 3 million widgets a year at $ 7 each. Her variable cost

Ms. Gold is in the widget business. She currently sells 1.3 million widgets a year at $7 each. Her variable cost to produce the widgets is $5 per unit, and she has $1,640,000 in fixed costs. Her sales-to-assets ratio is seven times, and 40 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 35 percent.
Her sister-in-law, Ms. Silverman, says Ms. Gold is doing it all wrong. By reducing her price to $6.00 a widget, she could increase her volume of units sold by 60 percent. Fixed costs would remain constant, and variable costs would remain $5 per unit. Her sales-to-assets ratio would be 10.0 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.
Compute earnings per share under the Silverman plan.
Note: Round your answer to 2 decimal places.

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access with AI-Powered Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Students also viewed these Finance questions