The Manning Company has financial statements as shown next, which are representative of the company’s historical average.
The Manning Company has financial statements as shown next, which are representative of the company’s historical average.
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7. The Manning Company has financial statements as shown next, which are representative of the company’s historical average. 
The firm is expecting a 35 percent increase in sales next year, and management is concerned about the company’s need for external funds. The increase in sales is expected to be carried out without any expansion of fixed assets, but rather through more efficient asset utilization in the existing store. Among liabilities, only current liabilities vary directly with sales. 
Income Statement  
Sales  $  220,000 
Expenses  171,200  
Earnings before interest and taxes  $  48,800 
Interest  8,300  
Earnings before taxes  $  40,500 
Taxes  16,300  
Earnings after taxes  $  24,200 



Dividends  $  7,260 
Balance Sheet  
Assets  Liabilities and Stockholders’ Equity  
Cash  $  8,000  Accounts payable  $  23,400 
Accounts receivable  33,000  Accrued wages  1,850  
Inventory  69,000  Accrued taxes  3,350  
Current assets  $  110,000  Current liabilities  $  28,600 
Fixed assets  93,000  Notes payable  8,300  
Longterm debt  21,500  
Common stock  117,000  
Retained earnings  27,600  
Total assets  $  203,000  Total liabilities and stockholders’ equity  $  203,000 





Using the percentofsales method, determine whether the company has external financing needs, or a surplus of funds. (Hint: A profit margin and payout ratio must be found from the income statement.) (Do not round intermediate calculations. Input the amount as a positive value.) 
The firm $ in . 
10. Healthy Foods Inc. sells 50pound bags of grapes to the military for $25 a bag. The fixed costs of this operation are $130,000, while the variable costs of grapes are $.20 per pound. 
a.  What is the breakeven point in bags? (Round your answer to 2 decimal places.) 
Breakeven point  bags 
b.  Calculate the profit or loss (EBIT) on 12,000 bags and on 34,000 bags. (Input all amounts as positive values. Round your answers to the nearest whole number.) 
Bags  Profit/Loss  Amount 
12,000  $  
34,000  $  

c.  What is the degree of operating leverage at 30,000 bags and at 34,000 bags? (Round your answers to 2 decimal places.) 
Bags  Degree of Operating Leverage 
30,000  
34,000  

d.  If Healthy Foods has an annual interest expense of $11,000, calculate the degree of financial leverage at both 30,000 and 34,000 bags. (Round your answers to 2 decimal places.) 
Bags  Degree of Financial Leverage 
30,000  
34,000  

e.  What is the degree of combined leverage at both 30,000 and 34,000 bags? (Round your answers to 2 decimal places.) 
Bags  Degree of Combined Leverage 
30,000  
34,000  

12. Lenow’s Drug Stores and Hall’s Pharmaceuticals are competitors in the discount drug chain store business. The separate capital structures for Lenow and Hall are presented next. 
Lenow  Hall  
Debt @ 10%  $  230,000  Debt @ 10%  $  460,000  
Common stock, $10 par  460,000  Common stock, $10 par  230,000  
Total  $  690,000  Total  $  690,000  
Common shares  46,000  Common shares  23,000  
a.  Complete the following table given earnings before interest and taxes of $27,000, $69,000, and $71,000. Assume the tax rate is 30 percent. (Leave no cells blank – be certain to enter “0” wherever required. Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places.) 
EBIT  Total assets  EBIT/TA  Lenow EPS  Hall EPS  What is the relationship between the EPS
of the two firms? 
$ 27,000  $690,000  %  $  $  
$ 69,000  $690,000  %  $  $  
$71,000  $690,000  %  $  $  

b1.  What is the EBIT/TA rate when the firm’s have equal EPS? 
EBIT/TA rate  % 
b2.  What is the cost of debt? 
Cost of debt  % 
b3.  State the relationship between earnings per share and the level of EBIT. 
EPS is unaffected by financial leverage when the pretax return on assets (EBIT/TA) the cost of debt. 
c.  If the cost of debt went up to 12 percent and all other factors remained equal, what would be the breakeven level for EBIT? 
Breakeven level  $ 
14. Dickinson Company has $11,840,000 million in assets. Currently half of these assets are financed with longterm debt at 9.2 percent and half with common stock having a par value of $8. Ms. Smith, VicePresident of Finance, wishes to analyze two refinancing plans, one with more debt (D) and one with more equity (E). The company earns a return on assets before interest and taxes of 9.2 percent. The tax rate is 45 percent. Tax loss carryover provisions apply, so negative tax amounts are permissable. 
Under Plan D, a $2,960,000 million longterm bond would be sold at an interest rate of 11.2 percent and 370,000 shares of stock would be purchased in the market at $8 per share and retired. 
Under Plan E, 370,000 shares of stock would be sold at $8 per share and the $2,960,000 in proceedswould be used to reduce longterm debt. 
a.  How would each of these plans affect earnings per share? Consider the current plan and the two new plans. (Round your answers to 2 decimal places.) 
Current Plan  Plan D  Plan E  
Earnings per share  $  $  $ 

b1.  Compute the earnings per share if return on assets fell to 4.60 percent. (Leave no cells blank – be certain to enter “0” wherever required. Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places.) 
Current Plan  Plan D  Plan E  
Earnings per share  $  $  $ 

b2.  Which plan would be most favorable if return on assets fell to 4.60 percent? Consider the current plan and the two new plans.  

b3.  Compute the earnings per share if return on assets increased to 14.2 percent. (Round your answers to 2 decimal places.) 
Current Plan  Plan D  Plan E  
Earnings per share  $  $  $ 

b4.  Which plan would be most favorable if return on assets increased to 14.2 percent? Consider the current plan and the two new plans.  

c1.  If the market price for common stock rose to $10 before the restructuring, compute the earnings per share. Continue to assume that $2,960,000 million in debt will be used to retire stock in Plan D and $2,960,000 million of new equity will be sold to retire debt in Plan E. Also assume that return on assets is 9.2 percent. (Round your answers to 2 decimal places.) 
Current Plan  Plan D  Plan E  
Earnings per share  $  $  $ 

c2.  If the market price for common stock rose to $10 before the restructuring, which plan would then be most attractive?  

15. The LopezPortillo Company has $11.3 million in assets, 90 percent financed by debt, and 10 percent financed by common stock. The interest rate on the debt is 10 percent and the par value of the stock is $10 per share. President LopezPortillo is considering two financing plans for an expansion to $21.5 million in assets. Under Plan A, the debttototalassets ratio will be maintained, but new debt will cost a whopping 10 percent! Under Plan B, only new common stock at $10 per share will be issued. The tax rate is 30 percent. 
a.  If EBIT is 11 percent on total assets, compute earnings per share (EPS) before the expansion and under the two alternatives. (Round your answers to 2 decimal places.) 
Earnings Per Share  
Current  $ 
Plan A  $ 
Plan B  $ 
b.  What is the degree of financial leverage under each of the three plans? (Round your answers to 2 decimal places.) 
Degree Of Financial Leverage  
Current  
Plan A  
Plan B  
c.  If stock could be sold at $20 per share due to increased expectations for the firm’s sales and earnings, what impact would this have on earnings per share for the two expansion alternatives? Compute earnings per share for each. (Round your answers to 2 decimal places.) 
Earnings Per Share  
Plan A  $ 
Plan B  $ 
The LopezPortillo Company has $11.3 million in assets, 90 percent financed by debt, and 10 percent financed by common stock. The interest rate on the debt is 10 percent and the par value of the stock is $10 per share. President LopezPortillo is considering two financing plans for an expansion to $21.5 million in assets. Under Plan A, the debttototalassets ratio will be maintained, but new debt will cost a whopping 10 percent! Under Plan B, only new common stock at $10 per share will be issued. The tax rate is 30 percent. 
a.  If EBIT is 11 percent on total assets, compute earnings per share (EPS) before the expansion and under the two alternatives. (Round your answers to 2 decimal places.) 
Earnings Per Share  
Current  $ 
Plan A  $ 
Plan B  $ 
b.  What is the degree of financial leverage under each of the three plans? (Round your answers to 2 decimal places.) 
Degree Of Financial Leverage  
Current  
Plan A  
Plan B  
c.  If stock could be sold at $20 per share due to increased expectations for the firm’s sales and earnings, what impact would this have on earnings per share for the two expansion alternatives? Compute earnings per share for each. (Round your answers to 2 decimal places.) 
Earnings Per Share  
Plan A  $ 
Plan B  $ 
16.
Delsing Canning Company is considering an expansion of its facilities. Its current income statement is as follows: 
Sales  $  5,200,000 
Variable costs (50% of sales)  2,600,000  
Fixed costs  1,820,000  



Earnings before interest and taxes (EBIT)  $  780,000 
Interest (10% cost)  240,000  



Earnings before taxes (EBT)  $  540,000 
Tax (40%)  216,000  



Earnings after taxes (EAT)  $  324,000 



Shares of common stock  220,000  
Earnings per share  $  1.47 

The company is currently financed with 50 percent debt and 50 percent equity (common stock, par value of $10). In order to expand the facilities, Mr. Delsing estimates a need for $2.2 million in additional financing. His investment banker has laid out three plans for him to consider:
1.Sell $2.2 million of debt at 10 percent. 2.Sell $2.2 million of common stock at $20 per share. 3.Sell $1.10 million of debt at 9 percent and $1.10 million of common stock at $25 per share.
Variable costs are expected to stay at 50 percent of sales, while fixed expenses will increase to $2,320,000 per year. Delsing is not sure how much this expansion will add to sales, but he estimates that sales will rise by $1.10 million per year for the next five years. Delsing is interested in a thorough analysis of his expansion plans and methods of financing.He would like you to analyze the following: 
a.  The breakeven point for operating expenses before and after expansion (in sales dollars). (Enter your answers in dollars not in millions, i.e, $1,234,567.) 
BreakEven Point  
Before expansion  $ 
After expansion  $ 

b.  The degree of operating leverage before and after expansion. Assume sales of $5.2 million before expansion and $6.2 million after expansion. Use the formula: DOL = (S − TVC) / (S − TVC − FC).(Round your answers to 2 decimal places.) 
Degree of Operating Leverage  
Before expansion  
After expansion  

c1.  The degree of financial leverage before expansion. (Round your answers to 2 decimal places.) 
Degree of financial leverage 
c2.  The degree of financial leverage for all three methods after expansion. Assume sales of $6.2 million for this question. (Round your answers to 2 decimal places.) 
Degree of Financial Leverage  
100% Debt  
100% Equity  
50% Debt & 50% Equity  

d.  Compute EPS under all three methods of financing the expansion at $6.2 million in sales (first year) and $10.2 million in sales (last year).(Round your answers to 2 decimal places.) 
Earnings per share  
First year  Last year  
100% Debt  $  $ 
100% Equity  
50% Debt & 50% Equity  



17.
Sinclair Manufacturing and Boswell Brothers Inc. are both involved in the production of brick for the homebuilding industry. Their financial information is as follows: 
Sinclair  Boswell  
Capital Structure  
Debt @ 10%  $  840,000  0  
Common stock, $10 per share  560,000  $  1,400,000  
Total  $  1,400,000  $  1,400,000  





Common shares  56,000  140,000  
Operating Plan:  
Sales (54,000 units at $15 each)  $  810,000  $  810,000  
Variable costs  648,000  324,000  
Fixed costs  0  304,000  
Earnings before interest and taxes (EBIT)  $  162,000  $  182,000  





The variable costs for Sinclair are $12 per unit compared to $6 per unit for Boswell. 
a.  If you combine Sinclair’s capital structure with Boswell’s operating plan, what is the degree of combined leverage? (Round your answer to 2 decimal places.) 
Degree of combined leverage 
b.  If you combine Boswell’s capital structure with Sinclair’s operating plan, what is the degree of combined leverage? (Round your answer to the nearest whole number.) 
Degree of combined leverage 
c.  In part b, if sales double, by what percentage will EPS increase? (Round your answer to the nearest whole percent.) 
EPS will increase by  % 