Sales $20 million Cost of goods sold 70% of sales General & administrative expen
ID: 2413719 • Letter: S
Question
Sales
$20 million
Cost of goods sold
70% of sales
General & administrative expenses
$300,000
Selling expense
$100,000 plus 10% of sales
Debt outstanding
$5 million at 8% interest rate
Effective tax rate
35%
Common shares outstanding
2 million
An analyst has developed an estimate of the earnings per share for her firm for the next year using the following parameters.Sales
$20 million
Cost of goods sold
70% of sales
General & administrative expenses
$300,000
Selling expense
$100,000 plus 10% of sales
Debt outstanding
$5 million at 8% interest rate
Effective tax rate
35%
Common shares outstanding
2 million
She is now interested in the sensitivity of earnings per share to sales forecast changes. A 10% sales increase would increase earnings per share by A. 7.0 cents per share. B. 10.4 cents per share. C. 13.0 cents per share. D. 20.0 cents per share.Explanation / Answer
Current With Increases Sales Sales revenue 20,000,000 22,000,000 Less: Cost of Goods sold@70% 14,000,000 15400000 Gross Margin 6,000,000 6,600,000 Less: Operating expensne Gen and admin expense 300,000 300,000 Selling fixed 100,000 100000 Selling variable 2000000 2200000 Interest 400000 400,000 ($ 5000,000*8%) Net income before tax 3,200,000 3,600,000 Common Share Outstanding 2,000,000 2,000,000 EPS 1.6 1.8 Answer is D. 20.0 cents per share
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