Question

Phu Lighters is doing its annual budget. It's expecting to start next year with the following mix of assets:

Current assets	$2,100,000
Capital assets	3,600,000
Total assets	$5,700,000

  

The asset mix is expected to stay at these levels for the whole year, with the exception of 3 months where current assets are expected to drop to $480,000. Its operating profit (EBIT) for the year is expected to be $620,000. Its tax rate is 40 percent. Shares are valued at $10 per share. It has a capital structure that is a combination of short-term bank financing and long-term financing (being 50% debt and 50% shareholder's equity). The short-term bank financing has an interest rate of 3 percent. The long-term debt financing has an interest rate of 6 percent. (Round the final answers to 2 decimal places.)

  a. Provide the following break-down of the asset mix:

	for 9 months	for 3 months
Temporary current assets
Permanent current assets
Capital assets
Total Assets

  b. Assuming the firm is perfectly hedged, provide the following break-down of the financing mix:

	for 9 months	for 3 months
Short-term financing
Long-term debt
Shareholder's equity

  c. Calculate expected EPS if the firm is perfectly hedged. (Round your answer to two decimal places.)

EPS            $

d. Recalculate c if short-term rates go to 8 percent while long-term rates remain the same. (Round your answer to two decimal places.)

	EPS
Perfectly Hedged	$

Answer 1

ANS. A

	9 MONTHS	3 MONTHS
TEMPORARY CURRENT ASSETS		$1620,000
PERMANENT CURRENT ASSETS	$2,100,000	480,000
CAPITAL ASSETS	3,600,000	3,600,000
TOTAL ASSETS	5,700,000	5,700,000

B

	9 MONTHS	3 MONTHS
SHORT TERM FINANCING	$1,800,000	$1,800,000
LONG TERM DEBT
SHAREHOLDERS EQUITY	1,800,000	1,800,000
TOTAL	3,600,000	3,600,000

C

OPERATING PROFIT ( EBIT) $620,000

LESS INTEREST @3% ON

2100000 FOR 9 MONTHS 47250

+ 3 % O 480000 FOR 3 MONTHS 3600

6 % ON 1800000 108000 158850

     

   461150

LESS TAX @ 40% 184460

  

276690

EARNING PER SHARE= NET PROFIT/N OF SHARES

NUMBER OF SHARES= 1800000/10=180000 SHARES

EPS 276690/180000

$1.54

D. EARNING BEFORE TAX $ 620000

LESS INTEREST 8% ON SHORT TERM BORROWING

8% ON 2100000 FOR 9 MONTHS 126000

8% ON 480000 FOR 3 MONTHS...........,.,.,., 9600

6% ON LONG TERM BORROWINGS 108000

6% ON 1800000 243600

     

376400

LESS TAX @40% 150560

     

225840

EPS 225840/180000=1.26