FIN3403 Ch12 13 Practice Problems Use this figure for problem reference SALES DCL DOL EPS DFL EBIT Sales Variable Costs Fixed Costs 950 000 270 000 Taxes 400 000 Interest Expense 40 000 84 000 1 If sales increase by 8 what should be the increase in EBIT Use the triangle so from SALES to EBIT use the DOL equation DOL Sales Variable Costs EBIT Sales 950 000 VC 270 000 Solve EBIT Sales 950 000 VC FC EBIT 280 000 270 000 400 000 DOL 950 000 270 000 280 000 2 4286 If sales increase by 8 multiply DOL by 8 0 08 Increase in EBIT 2 4286 0 08 19 43 Answer 19 43 2 If sales increase by 7 what should be the increase in earnings per share Use the triangle so from SALES to EPS earnings per share use the DCL equation DCL DFL DOL DOL 2 4286 DFL EIBT EBIT Interest 280 000 280 000 40 000 1 1667 DCL 2 4286 1 1667 If sales increase by 7 multiply DCL by 7 to get increase in EPS DCL 2 4286 1 1667 0 07 19 83 Answer 19 83 3 Your firm expects to earn 448 500 after taxes next year Sales will be 3 500 000 and fixed costs will be 1 300 000 Interest expense will amount to 350 000 Your firm manufactures office machines and expects to sell 8 750 units next year Your firm has a 35 tax rate What are your firm s total variable costs expected to be next year Set up income statement and fill in numbers given 3 500 000 Sales VC 1 300 000 FC EBIT 350 000 I EBT Tax 448 500 NI Step 1 Solve for EBT EBT NI 1 T 448 500 1 0 35 690 000 Sales 3 500 000 VC FC 1 300 000 EBIT I 350 000 690 000 EBT Tax 0 35 690 000 448 500 NI Step 2 Solve for EBIT EBT Interest EBIT 690 000 350 000 1 040 000 Step 3 Solve for VC Sales VC FC EBIT 3 500 000 VC 1 300 000 1 040 000 VC 1 160 000 Answer VC 1 160 000 4 For the previous problem if you are able to set fixed costs at 1 200 000 per year and change variable costs to 100 per unit how many units would you have to sell to break even Break even formula Fixed Costs Sales Price Variable Cost FC 1 200 000 VC 100 Sales Price Sales Units 3 500 000 8 750 400 BE 1 200 000 400 100 4000 Answer 4000 units 5 Anderson Corporation predicts that this year s sales will total 7 500 000 The selling price for their product is 62 50 per unit Variable costs amount to 38 per unit Net income after taxes is projected to be 165 750 The firm s marginal tax rate is 35 What will be the firm s total fixed costs Set up income statement Fill in numbers given Sales VC FC EBIT Tax NI 7 500 000 38 per unit 0 35 EBIT 165 750 Step 1 Solve for total VC VC total 38 of units of units Sales Sales Price 7 500 000 62 50 120 000 VC total 38 120 000 4 560 000 Sales VC FC EBIT Tax NI Sales VC FC EBIT Tax NI 7 500 000 4 560 000 0 35 EBIT 165 750 7 500 000 4 560 000 255 000 0 35 EBIT 165 750 Step 2 Solve for EBIT EBIT NI 1 T 165 750 1 T 255 000 Step 3 Solve for FC Sales VC FC EBIT 7 500 000 4 560 000 FC 255 000 FC 2 685 000 Answer 2 685 000 6 Stock dividends a may increase the value of the firm due to information content b increase the number of shares outstanding c are preferred by investors who desire capital gains d decrease the common stock account by the amount of the split e decrease the number of shares outstanding Answer B 7 Tom s Trash bins Inc has fixed costs of 226 800 The firm s sales are expected to be 427 500 this year if the firm sells 9500 units Variable costs amount to 40 of sales What is the break even point in units for Tom s Trash bins Break even point Fixed Costs Sales price Variable cost FC 226 800 SP 427 500 9500 units 45 VC 0 4 45 18 BEP 226 800 45 18 8 400 Answer 8 400 100 shares 3 2 150 shares Answer 150 shares Step 1 Find EPS EPS NI of shares of shares 400 000 3 2 600 000 8 XYZ has 400 000 shares of common stock outstanding a P E ratio of 8 and 500 000 in net income The board of directors has just voted in favor of a 3 for 2 stock split You owned 100 shares before the stock split How many do you own after the split 9 For the previous question what will be the total value of your investment after the split EPS 500 000 600 000 0 8333 PE Price EPS 8 Price 0 8333 Price 6 667 Investment value of shares price 150 6 667 1000 Answer 1000 10 NewTech Corporation is offering a 10 stock dividend The firm currently has 200 000 shares outstanding and after tax profits of 800 000 The current price of the stock is 48 What will be the firm s earnings per share after the stock dividend Total shares of shares 1 dividend EPS earnings per share Net income of shares 200 000 1 0 1 220 000 800 000 220 000 3 64 Answer EPS 3 64 11 For the previous question what will be the stock price after the stock dividend PE price EPS Before stock split PE 48 EPS EPS 800 000 200 000 4 PE 48 4 12 After stock split PE P 3 64 PE 12 from previous Price 12 3 64 43 6 Answer 43 6 The next five questions refer to the following information Kiwi Airlines has fixed operating costs of 5 8 million and its variable costs amount to 20 of sales revenue The firm has 2 million in bonds outstanding with a coupon interest rate of 8 Revenues for the firm are 8 000 000 and the firm is in the 40 corporate income tax bracket 12 What is the firm s degree of operating leverage DOL Sales Variable Costs EBIT Sales 8 000 000 VC 0 2 8 000 000 1 600 000 EBIT Sales VC FC 8 000 000 1 600 000 5 800 000 600 000 DOL 8 000 000 1 600 000 600 000 10 67 Answer 10 67 13 What is the firm s degree of financial leverage DFL EBIT EBIT Interest EBIT 600 000 Interest 0 08 2 000 000 160 000 DFL 600 000 600 000 160 000 1 36 Answer 1 36 14 How will a 10 increase in operating income affect earnings per share DFL 1 36 …