Based on the data for harding company, what is the quick ratio, rounded to one decimal point?

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Problem 4-1 Growth and financing [LO4] Philip Morris is excited because sales for his clothing company are expected to double from $720,000 to $1,440,000 next year. Philip notes that net assets (Assets – Liabilities) will remain at 40 percent of Sales. His clothing firm will enjoy a 9 percent return on total sales. He will start the year with $320,000 in the bank and is already bragging about the two Mercedes he will buy and the European vacation he will take.

(a) Compute his likely cash balance or deficit for the end of the year. Start with beginning cash and subtract the asset buildup (equal to 40 percent of the sales increase) and add in profit. (Negative amount should be indicated by a minus sign. Omit the "$" sign in your response.)

Ending cash balance $ 96800

(b) Does his optimistic outlook for his cash position appear to be correct? No

Yes

rev: 11_18_2012

Worksheet Problem 4-1 Growth and financing [LO4]

Learning Objective: 04-04 The various methods of

forecasting enable the firm to determine the amount

of new funds required in advance.

Problem 4-3 Growth and financing [LO4] Galehouse Gas Stations, Inc., expects sales to increase from $1,520,000 to $1,720,000 next year. Mr. Galehouse believes that net assets (Assets – Liabilities) will represent 35 percent of sales. His firm has a 9 percent return on sales and pays 50 percent of profits out as dividends.

(a) What effect will this growth have on funds? (Negative amount should be indicated by a minus sign. Omit the "$" sign in your response.)

The cash balance will change by $

.

(b) If the dividend payout is only 35 percent, what effect will this growth have on funds? (Omit the "$" sign in your response.)

The cash balance will change by $

.

rev: 09_27_2012

Worksheet Problem 4-3 Growth and financing [LO4]

Learning Objective: 04-04 The various methods of

forecasting enable the firm to determine the amount

of new funds required in advance.

Problem 4-4 Sales projections [LO2] The Alliance Corp. expects to sell the following number of units of copper cables at the prices indicated, under three different scenarios in the economy. The probability of each outcome is indicated.

Outcome Probability Units Price A .70 225 $ 20 B .10 370 35 C .20 510 45

What is the expected value of the total sales projection? (Omit the "$" sign in your response.)

Total expected value $ 9035

Worksheet Problem 4-4 Sales projections [LO2]

Learning Objective: 04-02 The three financial

statements for forecasting are the pro forma income

statement, the cash budget, and the pro forma

balance sheet.

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Problem 4-6 Sales projections [LO2] Cyber Security Systems had sales of 3,200 units at $50 per unit last year. The marketing manager projects a 10 percent increase in unit volume sales this year with a 10 percent price increase. Returned merchandise will represent 8 percent of total sales.

What is your net dollar sales projection for this year? (Omit the "$" sign in your response.)

Net sales $

Worksheet Problem 4-6 Sales projections [LO2]

Learning Objective: 04-02 The three financial

statements for forecasting are the pro forma income

statement, the cash budget, and the pro forma

balance sheet.

Problem 4-8 Production requirements [LO2] Sales for Western Boot Stores are expected to be 60,000 units for October. The company likes to maintain 30 percent of unit sales for each month in ending inventory (i.e., the end of October). Beginning inventory for October is 18,500 units.

How many units should Western Boot produce for the coming month?

Units to be produced

View Hint #1

Worksheet Problem 4-8 Production requirements [LO2]

Learning Objective: 04-02 The three financial

statements for forecasting are the pro forma income

statement, the cash budget, and the pro forma

balance sheet.

Problem 4-11 Cost of goods sold-FIFO [LO2] On December 31 of last year, Wolfson Corporation had in inventory 610 units of its product, which cost $18 per unit to produce. During January, the company produced 1,010 units at a cost of $21 per unit.

Assuming that Wolfson Corporation sold 1,120 units in January, what was the cost of goods sold (assume FIFO inventory accounting)? (Omit the "$" sign in your response.)

Cost of goods sold $

Worksheet Problem 4-11 Cost of goods sold-FIFO [LO2]

Learning Objective: 04-02 The three financial

statements for forecasting are the pro forma income

statement, the cash budget, and the pro forma

balance sheet.

Problem 4-13 Cost of goods sold-LIFO and FIFO [LO2] At the end of January, Mineral Labs had an inventory of 955 units, which cost $12 per unit to produce. During February the company produced 1,800 units at a cost of $16 per unit.

(a) If the firm sold 2,650 units in February, what was the cost of goods sold? (Assume LIFO inventory accounting.) (Omit the "$" sign in your response.)

Cost of goods sold $

(b) If the firm sold 2,650 units in February, what was the cost of goods sold? (Assume FIFO inventory accounting.) (Omit the "$" sign in your response.)

Cost of goods sold $

Worksheet Problem 4-13 Cost of goods sold-LIFO and FIFO

[LO2]

Learning Objective: 04-02 The three financial

statements for forecasting are the pro forma income

statement, the cash budget, and the pro forma

balance sheet.

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Problem 4-14 Gross profit and ending inventory [LO2] The Bradley Corporation produces a product with the following costs as of July 1, 2011: Material $ 5 per unit Labor 3 per unit Overhead 1 per unit

Beginning inventory at these costs on July 1 was 3,700 units. From July 1 to December 1, 2011, Bradley produced 13,400 units. These units had a material cost of $2, labor of $3, and overhead of $4 per unit. Bradley uses FIFO inventory accounting.

(a) Assuming that Bradley sold 14,400 units during the last six months of the year at $14 each, what would gross profit be? (Omit the "$" sign in your response.)

Gross profit $

(b) What is the value of ending inventory? (Omit the "$" sign in your response.)

Ending inventory $

View Hint #1

Worksheet Difficulty: Intermediate

Problem 4-14 Gross profit and ending inventory

[LO2]

Learning Objective: 04-02 The three financial

statements for forecasting are the pro forma income

statement, the cash budget, and the pro forma

balance sheet.

Problem 4-15 Gross profit and ending inventory [LO2] The Bradley Corporation produces a product with the following costs as of July 1, 2011:

Material $ 4 per unit Labor 4 per unit Overhead 2 per unit

Beginning inventory at these costs on July 1 was 4,000 units. From July 1 to December 1, 2011, Bradley produced 14,000 units. These units had a material cost of $2, labor of $3, and overhead of $4 per unit. Bradley uses LIFO inventory accounting.

(a) Assuming that Bradley sold 17,000 units during the last six months of the year at $14 each, what would gross profit be? (Omit the "$" sign in your response.)

Gross profit $

(b) What is the value of ending inventory? (Omit the "$" sign in your response.)

Ending inventory $

Worksheet Difficulty: Intermediate

Problem 4-15 Gross profit and ending inventory

[LO2]

Learning Objective: 04-02 The three financial

statements for forecasting are the pro forma income

statement, the cash budget, and the pro forma

balance sheet.

Problem 4-19 Schedule of cash receipts [LO2] Watt's Lighting Stores made the following sales projections for the next six months. All sales are credit sales.

March $ 48,000 June $ 52,000 April 54,000 July 60,000 May 43,000 August 62,000

Sales in January and February were $51,000 and $50,000, respectively. Experience has shown that of total sales, 10 percent are uncollectible, 35 percent are collected in the month of sale, 45 percent are collected in the following month, and 10 percent are collected two months after sale.

(a) Prepare a monthly cash receipts schedule for the firm for March through August. (Omit the "$" sign in

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your response.)

WATT'S LIGHTING STORES Cash Receipts Schedule

January February March April May June July August

Sales $ $ $ $ $ $ $ $

Collections of current sales

Collections of prior month's sales Collections of sales 2 months earlier

Total cash receipts $ $ $ $ $ $

(b) Of the sales expected to be made during the six months from March through August, how much will still be uncollected at the end of August? How much of this is expected to be collected later? (Omit the "$" sign in your response.)

Amount

Uncollected $

Expected to be collected $

Worksheet Difficulty: Intermediate

Problem 4-19 Schedule of cash receipts [LO2]

Learning Objective: 04-02 The three financial

statements for forecasting are the pro forma income

statement, the cash budget, and the pro forma

balance sheet.

Problem 4-23 Schedule of cash payments [LO2] The Volt Battery Company has forecast its sales in units as follows:

January 2,300 May 2,850 February 2,150 June 3,000 March 2,100 July 2,700 April 2,600

Volt Battery always keeps an ending inventory equal to 130% of the next month's expected sales. The ending inventory for December (January's beginning inventory) is 2,990 units, which is consistent with this policy. Materials cost $12 per unit and are paid for in the month after purchase. Labor cost is $5 per unit and is paid in the month the cost is incurred. Overhead costs are $13,500 per month. Interest of $9,500 is scheduled to be paid in March, and employee bonuses of $14,700 will be paid in June.

(a) Prepare a monthly production schedule for January through June.

VOLT BATTERY COMPANY Production Schedule

Jan. Feb. March April May June July

Forecasted unit sales

Desired ending inventory

Beginning inventory

Units to be produced

(b) Prepare a monthly summary of cash payments for January through June. Volt produced 2,100 units in December. (Omit the "$" sign in your response.)

VOLT BATTERY COMPANY Summary of Cash payments

Dec. Jan. Feb. March April May June

Units produced

Material cost $ $ $ $ $ $

Labor cost

Overhead cost

Interest

Employee bonuses

Total cash payments $ $ $ $ $ $

rev: 09_21_2012 11_12_2012

Worksheet Difficulty: Intermediate

Learning Objective: 04-02 The three financial

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Problem 4-23 Schedule of cash payments [LO2] statements for forecasting are the pro forma income

statement, the cash budget, and the pro forma

balance sheet.

Problem 4-25 Complete cash budget [LO2] Harry's Carryout Stores has eight locations. The firm wishes to expand by two more stores and needs a bank loan to do this. Mr. Wilson, the banker, will finance construction if the firm can present an acceptable three-month financial plan for January through March. The following are actual and forecasted sales figures:

Actual Forecast Additional Information November $ 270,000 January $ 420,000 April forecast $ 410,000 December 360,000 February 460,000 March 420,000

Of the firm's sales, 30 percent are for cash and the remaining 70 percent are on credit. Of credit sales, 40 percent are paid in the month after sale and 60 percent are paid in the second month after the sale. Materials cost 40 percent of sales and are purchased and received each month in an amount sufficient to cover the following month's expected sales. Materials are paid for in the month after they are received. Labor expense is 25 percent of sales and is paid for in the month of sales. Selling and administrative expense is 25 percent of sales and is also paid in the month of sales. Overhead expense is $31,500 in cash per month.

Depreciation expense is $10,700 per month. Taxes of $8,700 will be paid in January, and dividends of $5,500 will be paid in March. Cash at the beginning of January is $94,000, and the minimum desired cash balance is $89,000.

(a) Prepare a schedule of monthly cash receipts for January, February and March. (Omit the "$" sign in your response.)

HARRY’S CARRY-OUT STORES Cash Receipts Schedule

November December January February March April

Sales $ $ $ $ $ $

Cash sales

Credit sales

Collections in the month after credit sales) Collections two months after credit sales)

Total cash receipts $ $ $

(b) Prepare a schedule of monthly cash payments for January, February and March. (Omit the "$" sign in your response.)

HARRY’S CARRY-OUT STORES Cash Payments Schedule

January February March

Payments for purchases $ $ $

Labor expense

Selling and admin. exp.

Overhead

Taxes

Dividends

Total cash payments $ $ $

(c) Prepare a schedule of monthly cash budget with borrowings and repayments for January, February and March. (Leave no cells blank - be certain to enter "0" wherever required. Negative amounts should be indicated by a minus sign. Omit the "$" sign in your response.)

HARRY’S CARRY-OUT STORES Cash Budget

January February March

Total cash receipts $ $ $

Total cash payments

Net cash flow

Beginning cash balance

Cumulative cash balance

Monthly loan or (repayment)

Cumulative loan balance

Ending cash balance $ $ $

rev: 07_17_2012

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Worksheet Difficulty: Advanced

Problem 4-25 Complete cash budget [LO2]

Learning Objective: 04-02 The three financial

statements for forecasting are the pro forma income

statement, the cash budget, and the pro forma

balance sheet.

Problem 4-28 Percent-of-sales method [LO3] The Manning Company has financial statements as shown below, which are representative of the company’s historical average. The firm is expecting a 40 percent increase in sales next year, and management is concerned about the company’s need for external funds. The increase in sales is expected to be carried out without any expansion of fixed assets, but rather through more efficient asset utilization in the existing store. Among liabilities, only current liabilities vary directly with sales.

Income Statement Sales $300,000 Expenses 246,800 Earnings before interest and taxes $ 53,200 Interest 9,100 Earnings before taxes $ 44,100 Taxes 17,100 Earnings after taxes $ 27,000 Dividends $ 5,400

Balance Sheet Assets Liabilities and Stockholders' Equity

Cash $ 9,000 Accounts payable $ 29,000 Accounts receivable 56,000 Accrued wages 2,250 Inventory 70,000 Accrued taxes 4,750

Current assets $135,000 Current liabilities $ 36,000

Fixed assets 86,000 Notes payable 9,100

Long-term debt 25,500

Common stock 125,000

Retained earnings 25,400

Total assets $221,000 Total liabilities and stockholders' equity $221,000

Using the percent-of-sales method, determine the amount of external financing needs, or a surplus of funds required by the company. (Hint: A profit margin and payout ratio must be found from the income statement.) (Do not round intermediate calculations. Input the amount as positive value. Omit the "$" sign in your response.)

The firm (Click to select) $ in (Click to select) .

rev: 09_10_2011

Worksheet Difficulty: Advanced

Problem 4-28 Percent-of-sales method [LO3]

Learning Objective: 04-03 The percent-of-sales

method may also be used for forecasting on a less

precise basis.

Problem 5-2 Break-even analysis [LO2] The Hartnett Corporation manufactures baseball bats with Pudge Rodriguez’s autograph stamped on them. Each bat sells for $29 and has a variable cost of $16. There are $27,950 in fixed costs involved in the production process.

(a) Compute the break-even point in units. (Round your answer to the nearest whole number.)

Break-even point units

(b) Find the sales (in units) needed to earn a profit of $21,385.

Sales units

rev: 01_18_2013

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Worksheet Difficulty: Basic

Problem 5-2 Break-even analysis [LO2]

Learning Objective: 05-02 Break-even analysis

allows the firm to determine the magnitude of

operations necessary to avoid loss.

Problem 5-5 Break-even analysis [LO2] Eaton Tool Company has fixed costs of $464,600, sells its units for $98, and has variable costs of $52 per unit.

(a) Compute the break-even point.

Break-even point units

(b) Ms. Eaton comes up with a new plan to cut fixed costs to $360,000. However, more labor will now be required, which will increase variable costs per unit to $55. The sales price will remain at $98. What is the new break-even point? (Round your answer to the nearest whole number.)

New break-even point units

(c) Under the new plan, what is likely to happen to profitability at very high volume levels (compared to the old plan)?

Profitability will be less

Profitability will be more

Worksheet Difficulty: Basic

Problem 5-5 Break-even analysis [LO2]

Learning Objective: 05-02 Break-even analysis

allows the firm to determine the magnitude of

operations necessary to avoid loss.

Problem 5-8 Cash break-even analysis [LO2] Air Purifier, Inc., computes its break-even point strictly on the basis of cash expenditures related to fixed costs. Its total fixed costs are $2,410,000, but 10 percent of this value is represented by depreciation. Its contribution margin (price minus variable cost) for each unit is $32. How many units does the firm need to sell to reach the cash break-even point? (Round your answer to the nearest whole number.)

Cash break-even point units

Worksheet Difficulty: Basic

Problem 5-8 Cash break-even analysis [LO2]

Learning Objective: 05-02 Break-even analysis

allows the firm to determine the magnitude of

operations necessary to avoid loss.

Problem 5-9 Cash break-even analysis [LO2] Boise Timber co. computes its break-even point strictly on the basis of cash expenditures related to fixed costs. Its total fixed costs are $8,400,000, but 25 percent of this value is represented by depreciation. Its contribution margin (price minus variable cost) for each unit is $28. How many units does the firm need to sell to reach the cash break-even point? (Round your answer to the nearest whole number.)

Cash break-even point units

Worksheet Difficulty: Basic

Problem 5-9 Cash break-even analysis [LO2]

Learning Objective: 05-02 Break-even analysis

allows the firm to determine the magnitude of

operations necessary to avoid loss.

Problem 5-11 Degree of leverage [LO2, 5] The Harding Company manufactures skates. The company's income statement for 2010 is as follows:

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HARDING COMPANY Income Statement

For the Year Ended December 31, 2010 Sales (12,100 skates @ $92 each) $ 1,113,200 Less: Variable costs (12,100 skates at $41) 496,100 Fixed costs 360,000 Earnings before interest and taxes (EBIT) 257,100 Interest expense 70,500 Earnings before taxes (EBT) 186,600 Income tax expense (40%) 74,640 Earnings after taxes (EAT) $ 111,960

(a) Compute the degree of operating leverage. (Enter only numeric value rounded to 2 decimal places.)

Degree of operating leverage

(b) Compute the degree of financial leverage. (Enter only numeric value rounded to 2 decimal places.)

Degree of financial leverage

(c) Compute the degree of combined leverage. (Enter only numeric value rounded to 2 decimal places.)

Degree of combined leverage

(d) Compute the break-even point in units (number of skates). (Round your answer to the nearest whole number.)

Break-even point stakes

Worksheet Difficulty: Intermediate Learning Objective: 05-05 Combined leverage takes

into account both the use of fixed assets and debt.

Problem 5-11 Degree of leverage [LO2, 5]

Learning Objective: 05-02 Break-even analysis

allows the firm to determine the magnitude of

operations necessary to avoid loss.

Problem 5-12 Break-even point and degree of leverage [LO2, 5] Mo & Chris's Delicious Burgers, Inc., sells food to Military Cafeterias for $63 a box. The fixed costs of this operation are $403,100, while the variable cost per box is $34.

(a) What is the break-even point in boxes?

Break-even point boxes

(b) Calculate the profit or loss on 15,000 boxes and on 30,000 boxes. (Input all amounts as positive values. Omit the "$" sign in your response.)

Boxes Profit/Loss Amount

15,000 (Click to select) $

30,000 (Click to select) $

(c) What is the degree of operating leverage at 19,000 boxes and at 30,000 boxes? (Enter only numeric value rounded to 2 decimal places.)

Boxes Degree of

operating leverage

19,000

30,000

(d) If the firm has an annual interest expense of $12,400, calculate the degree of financial leverage at both 19,000 and 30,000 boxes.(Enter only numeric value rounded to 2 decimal places.)

Boxes Degree of

financial leverage

19,000

30,000

(e) What is the degree of combined leverage at both sales levels? (Enter only numeric value rounded to 2 decimal places.)

Boxes Degree of

combined leverage

19,000

30,000

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rev: 02_23_2012, 06_13_2013_QC_31736

View Hint #1

Worksheet Difficulty: Intermediate Learning Objective: 05-05 Combined leverage takes

into account both the use of fixed assets and debt.

Problem 5-12 Break-even point and degree of

leverage [LO2, 5]

Learning Objective: 05-02 Break-even analysis

allows the firm to determine the magnitude of

operations necessary to avoid loss.

Problem 5-14 Nonlinear breakeven analysis [LO2] International Data Systems information on revenue and costs is only relevant up to a sales volume of 122,000 units. After 122,000 units, the market becomes saturated and the price per unit falls from $12.00 to $7.80. Also, there are cost overruns at a production volume of over 122,000 units, and variable cost per unit goes up from $6.00 to $6.50. Fixed costs remain the same at $72,000.

(a) Compute operating income at 122,000 units. (Omit the "$" sign in your response.)

Operating income $

(b) Compute operating income at 222,000 units. (Omit the "$" sign in your response.)

Operating income $

rev: 02-16-2011

Worksheet Difficulty: Intermediate

Problem 5-14 Nonlinear breakeven analysis [LO2]

Learning Objective: 05-02 Break-even analysis

allows the firm to determine the magnitude of

operations necessary to avoid loss.

Problem 5-16 Earnings per share and financial leverage [LO4] Cain Auto Supplies and Able Auto Parts are competitors in the aftermarket for auto supplies. The separate capital structures for Cain and Able are presented below.

Cain Able Debt @ 9% $ 160,000 Debt @ 9% $ 320,000 Common stock, $10 par 320,000 Common stock, $10 par 160,000 Total $ 480,000 Total $ 480,000 Common shares 32,000 Common shares 16,000

(a) Compute earnings per share if earnings before interest and taxes are $32,000, $43,200, and $61,000 (assume a 20 percent tax rate). (Round your answers to 2 decimal places. Leave no cells blank - be certain to enter "0" wherever required. Omit the "$" sign in your response.)

Cain Able

Earnings per share at $32,000 $ $

Earnings per share at $43,200 $ $

Earnings per share at $61,000 $ $

(b) What is the relationship between earnings per share and the level of EBIT?

1. Before tax return on assets is less than cost of Debt (Click to select)

2. Before tax return on assets equals cost of Debt (Click to select)

3. Before tax return on assets is greater than cost of Debt (Click to select)

(c) If the cost of debt went up to 11 percent and all other factors remained equal, what would be the break- even level for EBIT? (Omit the "$" sign in your response.)

Break-even level $

View Hint #1

Worksheet Difficulty: Intermediate

Problem 5-16 Earnings per share and financial

leverage [LO4]

Learning Objective: 05-04 Financial leverage shows

how much debt the firm employs in its capital

structure.

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Problem 5-18 Combining operating and financial leverage [LO5] Sterling Optical and Royal Optical both make glass frames and each is able to generate earnings before interest and taxes of $132,000. The separate capital structures for Sterling and Royal are shown below:

Sterling Royal Debt @ 12% $ 660,000 Debt @ 12% $ 220,000 Common stock, $5 par 440,000 Common stock, $5 par 880,000 Total $1,100,000 Total $1,100,000 Common shares 88,000 Common shares 176,000

(a) Compute earnings per share for both firms. Assume a 25 percent tax rate. (Round your answers to 2 decimal places. Omit the "$" sign in your response.)

Earnings per share

Sterling $

Royal $

(b) In part a, you should have gotten the same answer for both companies' earnings per share. Assuming a P/E ratio of 22 for each company, what would its stock price be? (Use rounded Earnings per share. Round your answer to 2 decimal places. Omit the "$" sign in your response.)

Stock price $

(c) Now as part of your analysis, assume the P/E ratio would be 16 for the riskier company in terms of heavy debt utilization in the capital structure and 24 for the less risky company. What would the stock prices for the two firms be under these assumptions? (Note: Although interest rates also would likely be different based on risk, we will hold them constant for ease of analysis.) (Use rounded Earnings per share. Round your answers to 2 decimal places. Omit the "$" sign in your response.)

Stock price

Sterling $

Royal $

Worksheet Difficulty: Advanced

Problem 5-18 Combining operating and financial

leverage [LO5]

Learning Objective: 05-04 Financial leverage shows

how much debt the firm employs in its capital

structure.

Problem 5-20 Combining operating and financial leverage [LO5] Sinclair Manufacturing and Boswell Brothers Inc. are both involved in the production of brick for the homebuilding industry. Their financial information is as follows:

Capital Structure Sinclair Boswell Debt @ 11% $ 1,260,000 0 Common stock, $10 per share 840,000 $ 2,100,000 Total $ 2,100,000 $ 2,100,000 Common shares 84,000 210,000 Operating Plan Sales (61,000 units at $20 each) $ 1,220,000 $ 1,220,000 Less: Variable costs 976,000 610,000 ($ 16 per unit) ($ 10 per unit) Fixed costs 0 311,000 Earnings before interest and taxes (EBIT) $ 244,000 $ 299,000

(a) If you combine Sinclair’s capital structure with Boswell’s operating plan, what is the degree of combined leverage? (Enter only numeric value rounded to 2 decimal places.)

Degree of combined leverage

(b) If you combine Boswell’s capital structure with Sinclair’s operating plan, what is the degree of combined leverage? (Enter only numeric value.)

Degree of combined leverage

(d) In part b, if sales double, by what percentage will EPS increase? (Omit the "%" sign in your response.)

EPS will increase by %

Worksheet Difficulty: Advanced

Problem 5-20 Combining operating and financial

leverage [LO5]

Learning Objective: 05-05 Combined leverage takes

into account both the use of fixed assets and debt.

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Problem 5-23 Leverage and sensitivity analysis [LO6] Dickinson Company has $11,840,000 in assets. Currently half of these assets are financed with long-term debt at 9.2 percent and half with common stock having a par value of $8. Ms. Smith, vice-president of finance, wishes to analyze two refinancing plans, one with more debt (D) and one with more equity (E). The company earns a return on assets before interest and taxes of 9.2 percent. The tax rate is 45 percent.

Under Plan D, a $2,960,000 long-term bond would be sold at an interest rate of 11.2 percent and 370,000 shares of stock would be purchased in the market at $8 per share and retired.

Under Plan E, 370,000 shares of stock would be sold at $8 per share and the $2,960,000 in proceeds would be used to reduce long-term debt.

(a) Compute the earnings per share for the current plan and the two new plans. (Round your answers to 2 decimal places. Omit the "$" sign in your response.)

Current Plan Plan D Plan E

Earnings per share $ $ $

(b-1) Compute the earnings per share if return on assets fell to 4.60 percent. (Round your answers to 2 decimal places. Leave no cells blank - be certain to enter "0" wherever required. Negative amounts should be indicated by a minus sign. Omit the "$" sign in your response.)

Current Plan Plan D Plan E

Earnings per share $ $ $

(b-2) Which plan would be most favorable if return on assets fell to 4.60 percent? Consider the current plan and the two new plans.

Current Plan

Plan E

Plan D

(b-3) Compute the earnings per share if return on assets increased to 14.2 percent. (Round your answers to 2 decimal places. Omit the "$" sign in your response.)

Current Plan Plan D Plan E

Earnings per share $ $ $

(b-4) Which plan would be most favorable if return on assets increased to 14.2 percent? Consider the current plan and the two new plans.

Current Plan

Plan D

Plan E

(c-1) If the market price for common stock rose to $10 before the restructuring, compute the earnings per share. Continue to assume that $2,960,000 in debt will be used to retire stock in Plan D and $2,960,000 of new equity will be sold to retire debt in Plan E. Also assume that return on assets is 9.2 percent. (Round your answers to 2 decimal places. Omit the "$" sign in your response.)

Current Plan Plan D Plan E

Earnings per share $ $ $

(c-2) If the market price for common stock rose to $10 before the restructuring, which plan would then be most attractive?

Current Plan

Plan D

Plan E

rev: 01_31_2013_QC_24744

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Worksheet Difficulty: Advanced

Problem 5-23 Leverage and sensitivity analysis

[LO6]

Learning Objective: 05-06 By increasing leverage,

the firm increases its profit potential, but also its risk

of failure.

Problem 5-25 Leverage and sensitivity analysis [LO6] The Lopez-Portillo Company has $10.3 million in assets, 70 percent financed by debt and 30 percent financed by common stock. The interest rate on the debt is 12 percent and the par value of the stock is $10 per share. President Lopez-Portillo is considering two financing plans for an expansion to $16.5 million in assets. Under Plan A, the debt-to-total-assets ratio will be maintained, but new debt will cost a whopping 14