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%

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

5) D) $1.005

Explanation: Sales = 2700 × 1,000 = 2,700,00

(-) variable cost = 2700 × 350 = (945,000)

(-) fixed cost = (1,500,000)

EBIT = 255,000

(-) interest= 10% × 875,000(2,500,000 ×35%)= (87,500)

EBT = 167,500

(-)Tax (40%)= (67,000)

Net profit / earnings= 100,500

EPS = earnings / number of shares

= 100,500 / 100,000 = $1.005

6) B) 37.38%

Explanation: Equity= 2,500,000 (1-0.35)

= 2,500,000 (0.65)

= 1,625,000

Sales = 4000 × 1,000 = 4,000,000

(-) variable cost= 350 × 4000 = (1,400,000)

(-) fixed cost= (1,500,000)

EBIT= 1,100,000

(-) Interest = as in explanation 5 = (87,500)

EBT= 1,012,500

(-) Tax (40%) = (405,000)

Net profit= 607,500

Roe = net profit / equity

= 607,500 / 1,625,000

= 37.38%

7) C) 13.38%

Explanation: Equity= 1,625,000 ( as given in explanation 6)

Sales= 3,000 × 1,000 = 3,000,000

(-) variable cost= 350 × 3,000 = (1,050,000)

(-) fixed cost = (1,500,000)

EBIT= 450,000

(-) interest= (as given in explanation of Q6) = (87,500)

EBT= 362,500

(-) Tax (40%) = (145,000)

Net profit= 217,500

Roe= net profit / Equity

= 217,500 / 1,625,000

= 13.38%

8) D)6.18%

Explanation: Equity = 2,500,00 ( 1- 0.35)

= 2,500,000 (0.65)

= 1,625,000

Net profit= 100,500 ( as shown in explanation of 5)

Roe of weak = net profit / equity

= 100,500 / 1,625,000

= 6.18%