Question

Mr. Gold is in the widget business. He currently sells 1.3 million widgets a year at $7 each. His variable cost to produce the widgets is $5 per unit, and he has $1,640,000 in fixed costs. His sales-to-assets ratio is seven times, and 40 percent of his assets are financed with 9 percent debt, with the balance financed by common stock at $10 par value per share. The tax rate is 35 percent.
  
His brother-in-law, Mr. Silverman, says he is doing it all wrong. By reducing his price to $6.00 a widget, he could increase his volume of units sold by 60 percent. Fixed costs would remain constant, and variable costs would remain $5 per unit. His sales-to-assets ratio would be 10.0 times. Furthermore, he could increase his debt-to-assets ratio to 50 percent, with the balance in common stock. It is assumed that the interest rate would go up by 1 percent and the price of stock would remain constant.
A. Compute earnings per share under the gold plan

B. Compute earnings per share under the silverman plan

Answer 1