Chapter 05: Operating and Financial Leverage
5-16. (Continued)
b. Before-tax return on assets = 6.67 percent, 10 percent, and 40
percent at the respective levels of EBIT. When the before-tax
17. P/E ratio (LO6) The capital structure for Cain Supplies is presented next. Compute the
stock price for Cain if it sells at 19 times earnings per share and EBIT is $50,000. The tax
rate is 20 percent.
Cain
Debt @ 9% ……………………..
$100,000
Common stock, $10 par ……
200,000
Total …………………………..
$300,000
Common shares ……………….
20,000
5-17. Solution:
Cain Supplies
Cain
EBIT
$50,000
Less: Interest
9,000
EBT
$41,000
Less: Taxes @ 20%
8,200
EAT
$32,800
Shares
20,000
Chapter 05: Operating and Financial Leverage
a.
( VC)
DCL ( VC) FC
55,000 ($20 $10)
55,000 ($20 $10) $305,000 $99,000
550,000
QP
Q P I
−
=
− − −
−
=
− − −
