Question

An analyst has developed an estimate of the earnings per share for her firm for the next year using the following parameters.

Sales	$20 million
Cost of goods sold	70% of sales
General & administrative expenses	$300,000
Selling expense	$100,000 plus 10% of sales
Debt outstanding	$5 million at 8% interest rate
Effective tax rate	35%
Common shares outstanding	2 million

She is now interested in the sensitivity of earnings per share to sales forecast changes. A 10% sales increase would increase earnings per share by

A.

7.0 cents per share.

B.

10.4 cents per share.

C.

13.0 cents per share.

D.

20.0 cents per share.

Answer 1

			Current	With Increases Sales
Sales revenue			20,000,000	22,000,000
Less: Cost of Goods sold@70%			14,000,000	15400000
Gross Margin			6,000,000	6,600,000
Less: Operating expensne
Gen and admin expense			300,000	300,000
Selling fixed			100,000	100000
Selling variable			2000000	2200000
Interest			400000	400,000
($ 5000,000*8%)
Net income before tax			3,200,000	3,600,000
Common Share Outstanding			2,000,000	2,000,000
EPS			1.6	1.8
Answer is D. 20.0 cents per share