6.Saskatoon Prime Food (SPF) has 4 million shares with current market value of $32 per share and no debt. SPF produces and sells canned food. SPF's experience suggests that sales can vary from 6 million cans in the worst case scenario, 8 million cans under normal circumstances, to 10 million cans under excellent economic conditions. In order to keep a good image for the product, SPF keeps the price per can fixed at $5. On average, the variable cost per can is $2.00 while the fixed costs (selling, administrative, and plant) are approximately $10 million per year.

a.What would be the earnings per share (EPS) and the return on equity (ROE) under each of the scenarios predicted by SPF? (3 marks) Hint: Use the following table to answer the question, add or delete rows or columns if desired.

Sates of the Economy

Worst

Normal

Excellent

b.SPF is considering leverage. Management would like to have a debt to equity ratio (D/E) of 60%? How much debt they should issue to achieve this objective? And how many shares will remain outstanding after the leverage? (3 marks)

c.SPF borrows $48 million at 8% per annum. Under the new capital structure, what would be the earnings per share (EPS) and the return on Equity (ROE) under each of the scenarios predicted by SPF? (3 marks) Hint: Use the following table to answer the question, add or delete rows or columns if desired.

Sates of the Economy

Worst

normal

Excellent

d.What is the degree of financial leverage (DFL) at a sales level of 8 million cans and D/E ratio of 0.6? (2 Marks)

e.At a D/E ratio of 0.6, what is the break-even EBIT? (3 marks)

Answer rating: 100% (QA)

a To calculate the earnings per share EPS and return on equity ROE under each scenario predicted by SPF we need to consider the sales variable costs f... View the full answer