Part II (Quantitative analyses) Use the following information to answer questions 5-8. ABC, Inc. and CBA,...

Transcribed Image Text:

Part II (Quantitative analyses) Use the following information to answer questions 5-8. ABC, Inc. and CBA, Inc. are identical except for their debt-to-total assets ratios (D/TAS) and interest rates on debt. Each has $1 million in assets, $200,000 EBIT, and a 25 percent marginal tax rate. ABC has a D/TA ratio of 40 percent and pays 8 percent interest on its debt, whereas CBA has a 80 percent D/TA ratio and pays 15 percent interest on debt. Each firm has 100,000 shares of common stock outstanding. Assume both firms are financed only by debt and common equity. Hint: Debt amount = Total assets D/TA ratio. 5. What is ABC's EPS? 6. What is ABC's ROE? 7. What is CBA's EPS? 8. What is CBA's ROE? 9. Air & Water Company (NYSE: AWC) has a degree of operating leverage (DOL) equal to 4x and a degree of total leverage (DTL) equal to 8x. AWC forecasts that this year's sales will be $200,000 and that EBIT will be $100,000. If sales actually turn out to be $220,000, what will AWC's EBIT be? 10. Air-Powered Autos (NASDAQ: APA) has forecasted that its EPS will be $3 per share this year. If the firm's degree of operating leverage (DOL) is 4.0x and its degree of financial leverage (DFL) is 2.5x, what will its EPS be if sales turn out to be 5 percent higher than expected? Part II (Quantitative analyses) Use the following information to answer questions 5-8. ABC, Inc. and CBA, Inc. are identical except for their debt-to-total assets ratios (D/TAS) and interest rates on debt. Each has $1 million in assets, $200,000 EBIT, and a 25 percent marginal tax rate. ABC has a D/TA ratio of 40 percent and pays 8 percent interest on its debt, whereas CBA has a 80 percent D/TA ratio and pays 15 percent interest on debt. Each firm has 100,000 shares of common stock outstanding. Assume both firms are financed only by debt and common equity. Hint: Debt amount = Total assets D/TA ratio. 5. What is ABC's EPS? 6. What is ABC's ROE? 7. What is CBA's EPS? 8. What is CBA's ROE? 9. Air & Water Company (NYSE: AWC) has a degree of operating leverage (DOL) equal to 4x and a degree of total leverage (DTL) equal to 8x. AWC forecasts that this year's sales will be $200,000 and that EBIT will be $100,000. If sales actually turn out to be $220,000, what will AWC's EBIT be? 10. Air-Powered Autos (NASDAQ: APA) has forecasted that its EPS will be $3 per share this year. If the firm's degree of operating leverage (DOL) is 4.0x and its degree of financial leverage (DFL) is 2.5x, what will its EPS be if sales turn out to be 5 percent higher than expected?