A firm has earnings before interest and tax of $1,000,000

A firm has earnings before interest and tax of $1,000,000

Subject: Business    / Finance
Question

P 9-2 A firm has earnings before interest and tax of $1,000,000, interest of $200,000, and net income of $400,000 in Year 1. Required

a. Calculate the degree of financial leverage in base Year 1.

b. If earnings before interest and tax increase by 10% in Year 2, what will be the new level of earnings, assuming the same tax rate as in Year 1?

c. If earnings before interest and tax decrease to $800,000 in Year 2, what will be the new level of earnings, assuming the same tax rate as in Year 1?

P 9-13 Consecutive five-year balance sheets and income statements of Donna Szabo Corporation are shown below and on the following page. Required

a. Compute or determine the following for the years 2007–2011:

1. Degree of financial leverage 2. Earnings per common share

3. Price/earnings ratio

4. Percentage of earnings retained

5. Dividend payout

6. Dividend yield

7. Book value per share

8. Materiality of options (use stock options outstanding)

b. Comment from the perspective of an investor.

DONNA SZABO CORPORATION BALANCE SHEETS December 31, 2007 through December 31, 2011

(Dollars in thousands) 2011 2010 2009 2008 2007

Assets Current assets:

Cash $ 26,000 $ 27,000 $ 29,000 $ 28,000 $ 27,000

Accounts receivable, net 125,000 126,000 128,000 130,000 128,000

Inventories 140,000 143,000 145,000 146,000 144,000

Total current assets 291,000 296,000 302,000 304,000 299,000

Property, plant, and equipment, net 420,000 418,000 417,000 418,000 415,000

Total assets $ 711,000 $ 714,000 $ 719,000 $ 722,000 $ 714,000

Liabilities and Stockholders’ Equity

Current liabilities:

Accounts payable $ 120,000 $ 122,000 $ 122,500 $ 124,000 $ 125,000

Income taxes 12,000 13,000 13,500 13,000 12,000

Total current liabilities 132,000 135,000 136,000 137,000 137,000

Long-term debt 90,000 65,000 67,000 68,000 69,000

(Dollars in thousands) 2011 2010 2009 2008 2007

Stockholders’ equity:

Preferred stock 49,000 76,000 80,000 82,000 75,000

Common stock 290,000 290,000 290,000 290,000 290,000

Paid-in capital in excess of par, common stock 70,000 70,000 70,000 70,000 70,000

Retained earnings 80,000 78,000 76,000 75,000 73,000

Total stockholders’ equity 489,000 514,000 516,000 517,000 508,000

Total liabilities and stockholders’ equity $711,000 $714,000 $719,000 $722,000 $714,000

DONNA SZABO CORPORATION STATEMENT OF EARNINGS Years Ended December 31, 2007–2011

(In thousands, except per share) 2011 2010 2009 2008 2007

Net sales $ 890,000 $ 870,000 $ 850,000 $ 935,000 $ 920,000

Cost of goods sold (540,000) (530,700) (522,750) (579,000) (570,000)

Gross profit 350,000 339,300 327,250 356,000 350,000

Selling and administrative expense (230,000) (225,000) (220,000) (225,000) (224,000)

Interest expense (9,500) (6,600) (6,800) (6,900) (7,000)

Earnings from continuing operations before income taxes 110,500 107,700 100,450 124,100 119,000

Income taxes (33,000) (33,300) (32,100) (30,400) (37,400)

Earnings from continuing operations 77,500 74,400 68,350 93,700 81,600

Extraordinary gains, net of taxes 20,000 — — — —

Net earnings $ 97,500 $ 74,400 $ 68,350 $ 93,700 $ 81,600 Earnings per share:

Continuing operations $ 2.67 $ 2.57 $ 2.36 $ 3.23 $ 2.81 Extraordinary gain 0.69 — — — —

Net earnings per share $ 3.36 $ 2.57 $ 2.36 $ 3.23 $ 2.81

Note: Additional data:

1. Preferred stock dividends (in thousands): 2011 $3,920 2010 $6,100 2009 $6,400 2008 $6,600 2007 $6,000

2. Common shares outstanding, 29,000,000 (actual) (2007–2011)

3. Stock options outstanding, 1,000,000 (actual) (2007–2011)

4. Dividends per common share (actual): 2011 $3.16 2010 $2.29 2009 $2.10 2008 $2.93 2007 $2.80

5. Market price per common share (actual): 2011 $24.00 2010 $22.00 2009 $21.00 2008 $37.00 2007 $29.00