Question

1. Calculate the EPS, ROE and DFL based on the following data for the Rankin Co....

1. Calculate the EPS, ROE and DFL based on the following data for the Rankin Co.

Bonds (13%)                               $22 million

Common Stock ($3 par)               $15 million

Retained Earnings                       $3 million

Current EBIT                     $16 million

Tax rate                            30 %

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Answer #1

Interest on Bonds = 13% of $22 million

= 0.13*$22000000

= $2860000

Net income = (EBIT-Interest)*(1-Tax rate)

= ($16000000-$2860000)*(1-0.30)

= $13140000*(1-0.30)

= $9198000

Number of shares outstanding = $15000000/$3

= 5000000

Earnings per share = Net income/Number of shares outstanding

= $9198000/5000000

= $1.8396

Sharehoders' Equity = Common stock + Retained earnings

= $15 million + $3 million

= $18 million

ROE = Net income/Shareholders' Equity

= $9198000/$18000000

= 51.10%

DFL = EBIT/(EBIT-Interest)

= $16000000/$13140000

= 1.2177

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