Use the data in the paragraph below and the information in the table below to an

Question

Use the data in the paragraph below and the information in the table below to answer the next three questions. Sinclair, Inc. is a levered firm with assets valued at $10,000 and has debt issued at 10% interest. Sinclair pays tax att and boom. Note: EBIT earnings before interest and tax, $ Interest-dollar amount of interest owed on the debt, NIBT net income before tax, N. net income, EPS earnings per share) Assume that firms with negative NIBT pay no tax. he rate of 34%. The firm faces EBIT sc enario s of recession A portion of the inputs to the income statement are provided below, and a portion is not. Use the information above to fill in all the missing values. EBIT S INTEREST NIBT TAXES N EPS $900 BOOM RECESSION $200 _(S550)$1.32 23. If Sinclair's leverage factor is 4, what amount comes closest to the amount of debt issued? A. 2,500 B. 4,000 C. 5,000 D. 6,500 E. 7,500 24. What amount comes closest to Sinclair's NI is the BOOM scenario? A. $99 B. $90 C. $66 D. $60 E. $51 25. What amount comes closest to Sinclair's EPS in the RECESSION scenario? A. ($7.33) B. (S3.33) C. $O D. $3.33 E. $7.33

Explanation / Answer

23) Calculation of the amount closest to the amount of debt issued -

Formula -

Financial Leverage - EBIT / (EBIT - I)

EBIT = Earnings Before Interest and Tax

EBT = Earnings Before Tax

Calculation -

Let us assume interest as 'a'

Leverage factor = 4 = $900 / ($900 - a)

4($900 - a%) = $900

$3,600 - 4a% = $900

4a% = $3,600 - $900

4a% = $2,700

a% = $2,700 / 4

a% = $ 675

a = $6,750

The amount closest to the amount of debt issued = $7,500

NOTE - We cannot take $6,500 as it is less than $6,750. So, we consider $7,500 or in RECESSION if we calculate then Interest amount is $750 [(550) - $200 = ($750)] which gives amount of debt as $7,500 [$750 / 10%]

Debt = $7,500

Interest = 10% of  $7,500 = $750

24) Amount comes closest to Sinclair's NI is the BOOM scenario will be -

EBIT = $900

$Interest = 10% of $7,500 = $750

Therefore, NIBT = $900 - $750 = $150

Tax = 34% of $150 = $51

NI = NIBT - Tax

= $150 - $51

=$99

NI = $99

Amount comes closest to Sinclair's NI is the BOOM scenario will be $99.

25) Amount comes closest to Sinclair's EPS in the RECESSION scenario will be -

NOTE - Assumption that, the firms whose NIBT is negative will pay NO tax. So, TAXES = 0.

So, NI = NIBT = ($550)

Solution -

For BOOM, EPS = $1.32

NI = $99

Formula -

No. of Shareholders = NI / EPS

Calculation -

No. of Shareholders = $99 / $1.32

No. of Shareholders = 75

For, RECESSION it will be -

Formula -

EPS = NI / No. of shareholders

Calculation -

EPS = ($550) / 75

= ($ 7.33)

Amount comes closest to Sinclair's EPS in the RECESSION scenario will be ($7.33)

PARTICULARS EBIT $INTEREST NIBT TAXES NI EPS Boom $900 $750 $250 $51 $99 $1.32 Recession $200 $750 ($550) 0 ($550) ($7.33)

Related Questions

Navigate

• Browse (All)
• Browse U
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.