Mr. Gold is in the widget business. He currently sells 1.1 million widgets a yea

Question

Mr. Gold is in the widget business. He currently sells 1.1 million widgets a year at $8 each. His variable cost to produce the widgets is $6 per unit, and he has $1,730,000 in fixed costs. His sales-to-assets ratio is eight times, and 40 percent of his assets are financed with 8 percent debt, with the balance financed by common stock at $10 par value per share. The tax rate is 35 percent.
    His brother-in-law, Mr. Silverman, says he is doing it all wrong. By reducing his price to $7.50 a widget, he could increase his volume of units sold by 60 percent. Fixed costs would remain constant, and variable costs would remain $6 per unit. His sales-to-assets ratio would be 11.0 times. Furthermore, he could increase his debt-to-assets ratio to 50 percent, with the balance in common stock. It is assumed that the interest rate would go up by 1 percent and the price of stock would remain constant.

Compute earnings per share under the Gold plan.(Enter your answer in dollars not in millions. Round your answer to 2 decimal places. Omit the "$" sign in your response.)

Compute earnings per share under the Silverman plan.(Enter your answer in dollars not in millions.Round your answer to 2 decimal places. Omit the "$" sign in your response.)

Mr. Gold is in the widget business. He currently sells 1.1 million widgets a year at $8 each. His variable cost to produce the widgets is $6 per unit, and he has $1,730,000 in fixed costs. His sales-to-assets ratio is eight times, and 40 percent of his assets are financed with 8 percent debt, with the balance financed by common stock at $10 par value per share. The tax rate is 35 percent.
    His brother-in-law, Mr. Silverman, says he is doing it all wrong. By reducing his price to $7.50 a widget, he could increase his volume of units sold by 60 percent. Fixed costs would remain constant, and variable costs would remain $6 per unit. His sales-to-assets ratio would be 11.0 times. Furthermore, he could increase his debt-to-assets ratio to 50 percent, with the balance in common stock. It is assumed that the interest rate would go up by 1 percent and the price of stock would remain constant.

Explanation / Answer

Sales=1.1*8=8.8 million

Variable cost=1.1*6=6.6

Fixed cost=1730000

Sales/asset=8

Asset=8.8/8=1.1

Common stock =1.1*60%=0.66 million

Common stock=0.66/10=0.066 million shares

Interst=1.1*40%=0.44*8%=35200

Net income=8.8-6.6-1730000=470000-35200=434800*(1-0.35)=282620

EPS of gold=282620/66000=4.28

Silverman plan

Sales=1.76*7.5=13.2

Variable cost=1.76*6=10.56

Fixed cost=1730000

Sales/asset=11

Asset=13.2/11=1.2

common stock=1.2*50%=0.6

Common stock=0.6/10=0.06shares

Interst=1.2*50%=0.6*9%=0.054 million

Net income=13.2-10.56-1730000=910000-54000=856000*(1-0.35)=556400

Eps =556400/60000=9.27

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