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The Hurricane Lamp Company forecasts that next year's sales will be $6 million. Fixed operating costs are estimated to be $800,000, and the variable cost

The Hurricane Lamp Company forecasts that next year's sales will be $6 million. Fixed operating costs are estimated to be $800,000, and the variable cost ratio (that is, variable costs as a fraction of sales) is estimated to be 0.75. The firm has a $600,000 loan at 10 percent interest. It has 20,000 shares of $3 preferred stock and 60,000 shares of common stock outstanding. Hurricane Lamp is in the 40 percent corporate income tax bracket.

  1. Forecast Hurricane Lamp's earnings per share (EPS) for next year. Develop a complete income statement using the revised format illustrated inTable 14.1. Then determine what Hurricane Lamp's EPS would be if sales were 10 percent above the projected $6 million level.

Table 14.1

Traditional income statement format

Sales

Less: Cost of sales $2,500,000

Operating Cost Selling, general and admins exp $1,500,000

Total operating costs

Earnings before interest and taxes (EBIT)

Less: Interst expense

Earnings before taxes (EBT)

Financial costs Less: Income taxes (40% rate)

Earnings after taxes (EAT)

Less: Preferred stock dividends

Earnings available to common stockholders

Earnings per share (EPS) - 100,000 shares

Revised income statement format

Sales

Less: Variable operating costs $3,000,000

Operating leverage Fixed operating costs $1,000,000

Total operating costs

Earnings before interest and taxes (EBIT)

Less: Fixed capital costs (interest)

Earnings before taxes (EBT)

Financial leverage Less: Income taxes (variable), 40% rate

Earnings after taxes (EAT)

Less: Fixed capital cost (preferred stack dividents)

Earnings available to common stockholders

Earnings per share (EPS) - 100,000 shares

Complete in excel

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