Question

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 %

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

Calculate the EPS, ROE and DFL based on the following data for
the Rankin Co.
Bonds
(13%)
$12 million
Common Stock ($3
par)
$15 million
Retained
Earnings
$3 million
Current EBIT
$ 6 million
Tax
rate
30 %

The Presidio Pipe Co.
has the following capital structure:
Bonds (9.7%) $140
mil
Common Stock ($4 par)
$230 mil
Retained Earnings $170
mil
EBIT is $85 million
and the tax rate is 40 percent. What is the firm's ROE and EPS?
a
ROE = 10.71%
EPS = $.75
b
ROE = 7.94%
EPS = $.75
c
ROE = 12.4%
EPS = $.86
d
ROE = 11.7%
EPS = 13.2%

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