Ms. Gold is in the widget business. She currently sells 1.5 million widgets a year at $6 each. Her variable cost to produce the widgets is $4 per unit, and she has $1,550,000 in fixed costs. Her sales-to-assets ratio is six times, and 30 percent of her assets are financed with 10 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 $5.00 a widget, she could increase her volume of units sold by 60 percent. Fixed costs would remain constant, and variable costs would remain $4 per unit. Her sales-to-assets ratio would be 7.5 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.

1. Compute earnings per share under the Gold plan.

   Note: Round your answer to 2 decimal places.

2. Compute earnings per share under the Silverman plan.

   Note: Round your answer to 2 decimal places.

3. Ms. Gold's chief financial officer does not think that fixed costs would would remain constant under the Silverman plan but that they would go up by 15 percent. If this is the case, should Ms. Gold shift to the Silverman plan, based on earnings per share?
   multiple choice

   • Yes

   • No