Barrilla Group’s CEO has made the forecast of sales as shown in the following table.

The company has fixed operating costs of €1,500,000 and variable operating costs of 75% of the sales level. The company pays €135,000 in interest per year. The tax rate is 24%.

a. Compute the earnings before interest and taxes (EBIT) for each level of sales.

b. Compute the earnings per share (EPS) for each level of sales, the expected EPS, the standard deviation of the EPS, and the coefficient of variation of EPS, assuming that there are 25,500 shares of common stock outstanding.

c. Barilla has the opportunity to reduce its leverage to zero and pay no interest. This change will require that the number of shares outstanding be increased to 30,000. Repeat part b under this assumption.

d. Compare you findings in parts b and c, and comment on the effect of the reduction of debt to zero on the firm’s financial risk.

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Sales 12,000,000 15,500,000 18,300,000 Probability 0.25 0.50 0.25