Q1) Tower Interiors has made forecast of sales listed in following table. Also given is probability of each level of sales.
|
Sales
|
Probability
|
|
$200,000
|
0.2
|
|
$300,000
|
0.6
|
|
$400,000
|
0.2
|
Firm has fixed operating cost of $75,000 and variable operating cost equal to 70% of sales level. Company pays $12,000 in interest per period. Tax rate is 40%.
a) Calculate Earnings before interest and taxes (EBIT) for each level of sales.
b) Calculate Earnings per share (EPS) for each level of sales, expected EPS, standard deviation of EPS, and coefficient of variation of EPS, supoose that there are $10,000 shares of common stock outstanding,
c) Tower has opportunity to reduce its leverage to zero and pay no interest. This will need that number of shares outstanding be increased to $15,000. Repeat part b under this assumption.
d) Compare the findings in parts b and c, and comment on effect of reduction of dept to zero on firm's financial risk.