Question

A. Luther Corporation

Consolidated Income Statement

Year ended December 31​ (in $millions)

	2006	2005
Total sales	610.1	578.3
Cost of sales	−500.2	−481.9
Gross profit	109.9	96.4
​Selling, general, and administrative expenses	−40.5	−39.0
Research and development	−24.6	−22.8
Depreciation and amortization	−3.6	−3.3
Operating income	41.2	31.3
Other income	−−	−−
Earnings before interest and taxes​ (EBIT)	41.2	31.3
Interest income​ (expense)	−25.1	−15.8
Pretax income	16.1	15.5
Taxes	−5.5	−5.3
Net income	10.6	10.2
Price per share	​$16	​$15
Sharing outstanding​ (millions)	10.2	6.9
Stock options outstanding​ (millions)	0.2	0.3
​Stockholders' Equity	126.6	63.6
Total Liabilities and​ Stockholders' Equity	533.1	386.7

Refer to the income statement above. For the year ending December​ 31, 2006​ Luther's earnings per share is closest to​ ________.

A. 0.52

b. 1.04

c. 0.83

d. 1.25

b.

A vintner is deciding when to release a vintage of sauvignon blanc. If it is bottled and released​ now, the wine will be worth $2.6

million. If it is barrel aged for a further​ year, it will be worth 20​% more, though there will be additional costs of

$780,000 incurred at the end of the year. If the interest rate is​ 7%, what is the present value of the difference in the benefit the vintner will realize if he releases the wine after barrel aging it for one year or if he releases the wine​ now?

a. He will earn $2,600,000 less if he releases the wine now.

b. He will earn $260,000 less if he releases the wine now

c. He will earn $364,000 more if he releases the wine now.

d. He will earn ​$413,084 more if he releases the wine now.

Answer 1

a. Earnings per share is computed as shown below:

= Net Income / Number of shares outstanding

= $ 10.6 million / 10.2 million

= $ 1.04 Approximately

So, the correct answer is option b.

b. Present value if the wine is released now will be $ 2.6 million

Present value if the wine is released after one year is computed as follows:

= ($ 2.6 million x 1.20 - $ 780,000) / 1.07

= $ 2.186915888 million

So, the difference will be as follows:

= $ 2.6 million - $ 2.186915888 million

= $ 413,084 Approximately

So, the correct answer is option d.

Feel free to ask in case of any query relating to this question