Question

Khonaysser Motors needs a total capital of $2,500,000 for its new project. The company’s debt ratio is 35% and they are paying interest equal to 10%. The number of shares expected to be constant at 100,000 shares during the year 2020.
Below you can find expected useful information for the year 2020.

Economy Probability Units Sold
Good 0.25   4,000
Normal   0.40 3,000
Weak 0.35 2,700

Price / Unit $ 1000
Fixed Costs $ 1,500,000

Variable cost/ Unit $ 350
Price /Share $ 16.25
Tax Rate 40%

1: Find Total Equity *

a.$1,625,000

b.$1,675,000

c.$1,750,000

d.$875,000

2: Find Interest Expense *

$88,000

$87,500

$87,250

$87,000

3: Calculate EPS if the economy is Good *

$6.075

$2.175

$2.125

$1.005

4: Calculate EPS if the economy is Normal *

$6.075

$2.175

$2.125

$1.005

5: Calculate EPS if the economy is Weak *

$6.075

$2.175

$2.125

$1.005

6: Calculate ROE if the economy is Good *

40.20%

37.38%

13.38%

6.18%

7: Calculate ROE if the economy is Normal *

40.20%

37.38%

13.38%

6.18%

8: Calculate ROE if the economy is Weak *

40.20%

37.38%

13.38%

6.18%

9: Calculate the expected ROE *

16.86%

37.38%

18.75%

6.18%

10: Calculate the risk in ROE (σROE) *

12.2502%

2.8456%

1.9544%

2.3318%

11: Calculate the expected EPS *

$3.2035

$2.7405

$2.5258

$1.9062

12: Calculate the risk in EPS (σEPS) *

$3.5235

$1.9987

$2.5225

$1.7564

Answer 1

1) Debt Ratio = Total Debt / Total Capital = 35%
Equity Ratio = Total Equity / Total Capital
Equity Ratio = 100% - Debt Ratio
= 100% - 35%
= 65%

Total Capital = 2500000
Total Equity = 2500000 * 0.65
Total Equity = $1,625,000

2) Total Debt = Total Capital - Total Equity
= 2,500,000 - 1,625,000
= 875000

Interest Rate = 10%
Interest Amount = Interest Rate * Total Debt
= 0.1 * 875,000
Interest Amount = $87,500

3) EPS if the economy is good

Particulars	Amount
Sales (4000 * 1000)	4000000
(-) Variable Cost (350*4000)	(1400000)
Gross Profit	2600000
(-) Fixed Cost	(1500000)
Operating Profit	1100000
(-) Interest	(87500)
Earnings before Tax	1012500
(-) Tax	(405000)
Net Income	607500

EPS = Net Income / No. of Shares
= 607500/100000
EPS = $6.075

4) EPS if the economy is normal

Particulars	Amount
Sales (3000 * 1000)	3000000
(-) Variable Cost (350*3000)	(1050000)
Gross Profit	1950000
(-) Fixed Cost	(1500000)
Operating Profit	450000
(-) Interest	(87500)
Earnings before Tax	362500
(-) Tax	(145000)
Net Income	217500

EPS = Net Income / No. of Shares
= 217500/100000
EPS = $2.175