Running head: BUS555 HOMEWORK ASSIGNMENT 1 1
BUS555 Homework Assignment 1
Jenni McRoy
University of Mary
Managerial Finance
BUS 555
Michael T Schmitz
September 10, 2017
BUS555 HOMEWORK ASSIGNMENT 1 2
BUS555 Homework Assignment 1
Chapter 2:
2-2: Balance Sheet: Casello Mowing & Landscaping’s year-end 2015 balance sheet lists current
assets of $435,200, fixed assets of $550,800, current liabilities of $416,600, and long-term debt
of $314,500. Calculate Casello’s total stockholders’ equity.
Assets = Liabilities + equity
Assets Liabilities & equity
Current Assets $435,200 Current liabilities $416,600
Fixed Assets $550,800 Long-term debt $314,500
Total Assets $986,000 $731,100
Total Stockholders’ equity $254,900
Total assets -Liabilities:
($986,000-$731,100 = $254,900)
2-3: Income Statement: The Fitness Studio, Inc.’s, 2015 income statement lists the following
income and expenses: EBIT=$538,000, interest expense =$63,000, and net income = $435,000.
Calculate the 2015 taxes reported on the income statement.
EBIT $538,000
Interest expense $ 63,000
EBT $475,000
Net Income $435,000
$40,000 (2015 reported taxes on the income statement)
BUS555 HOMEWORK ASSIGNMENT 1 3
2-4: Income Statement: The Fitness Studio, Inc.’s, 2015 income statement lists the following
income and expenses: EBIT=$773,500, interest expense=$100,000, and taxes=$234,500. The
firm has no preferred stock outstanding and 100,000 shares of common stock outstanding.
Calculate the 2015 earnings per share.
Earnings per share (EPS) = Net income/total shares of common stock outstanding
EBIT $773,500
Interest Expense $100,000
EBT $673,500
Taxes $234,500
Net Income $439,000
EPS = $439,000/100,000
EPS = $4.39
2-5: Income Statement: Consider a firm with an EBIT of $850,000. The firm finances its assets
with $2,500,000 debt (costing 7.5%) and 400,000 shares of stock selling $5.00 per share. To
reduce the firm’s risk associated with this financial leverage, the firm is considering reducing its
debt by $1,000,000 by selling an additional 200,000 shares of stock. The firm is in the 40% tax
bracket. The change in capital structure will have no effect on the operations of the firm. Thus,
EBIT will remain at $850,000. Calculate the change in the firm’s EPS from this change in
capital structure.
Before capital structure change After capital structure change
EBIT $850,000 EBIT $850,000
Interest (2,500,000 x 0.075) $187,500 Interest ($1,500,000 x 0.075) $112,500
EBT $662,500 EBT $737,500
BUS555 HOMEWORK ASSIGNMENT 1 4
Taxes (40% x $662,500) $265,000 Taxes (40% x $737,500) $295,000
Net Income $397,500 Net Income $442,500
# of shares 400,000 # of shares 600,000
EPS ($397,500/400,000) $0.99375 EPS ($442,500/600,000) $0.7375
The change in capital structure would decrease stockholders EPS by $0.25625
2-6: Income Statement: Consider a firm with an EBIT of $550,000. The firm finances its assets
with $1,000,000 debt (costing 5.5%) and 200,000 shares of stock selling at $12.00 per share.
The firm is considering increasing its debt by $900,000, using the proceeds to buy back 75,000
shares of stock. The firm is in the 40% tax bracket. The change in capital structure will have no
