In Class ExerciseWednesday, June 10, 20206-10-20A The CFO of Metal Recycling Inc. has come up with...

In Class ExerciseWednesday, June 10, 20206-10-20A The CFO of Metal Recycling Inc. has come up with the following projected figures for next year:Sales275,000Costs70% of salesDepreciation30,000Tax rate21%Current Shares outstanding11,000Metal Recycling Inc has no debt currently, but the board is considering a loan of $300,000 at 11% interest, which they will use to repurchase shares of their own stock at $100 per share. The CFO thinks his projections of sales may be off by + or - 10%. Depreciation will stay the same. What will their EPS be under the current structure and under the proposed structure for each scenario? Is the restructuring a good idea?

Expert Solution

Calculation of Earning per Share (EPS)

Particulars	Current Structure	Proposed Structure
10% Increase	10% Decrese
Sales	275,000.00	302,500.00	247,500.00
Cost	192,500.00	211,750.00	173,250.00
Depreciation	30,000.00	30,000.00	30,000.00
Interest Expenses	-	33,000.00	33,000.00
Profit before tax	52,500.00	27,750.00	11,250.00
Tax expense @21%	11,025.00	5,827.50	2,362.50
Profit after tax	41,475.00	21,922.50	8,887.50
No. of shares outstanding	11,000.00	8,000.00	8,000.00
Earning per share	3.77	2.74	1.11

Working note

Calculation of share outstanding
Loan taken	$300,000
Buy Back price per share	$100
Therfore,
No.of share Buy Back	300000 / 100	3000	Shares

Earning Per share =	Profits after tax / No. of share outstanding

Comment : Reconstruction option is not viable as it decreases EPS.

jeff jeffy answered 1 year ago

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