Question
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.
- 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
Answer
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