Question

Phoenix Sound is developing a plan to finance its asset base.The firm's assets are composed of:

Current Assets

$6,000,000

Capital Assets

$10,000,000

Total Assets

$16,000,000

Of the current assets, $2.0 million is considered temporary current assets.Under the plan, 30% of assets would be financed using short-term sources and 70% would be financed using long-term sources.The long-term sources of financing would consist of 40% debt and 60% of equity.Shares are valued at $10 per share.

Currently the firm earns a contribution margin of $1,500,000, which is adequate to cover annual fixed operating costs of $500,000.Short-term and long-term financing interest rates are 5% and 8% respectively.Corporate tax rate is 40%.

a) S/T Interest Expense is:

$240,000

$361,000

$412,000

275,000

b) L/T Interest Expense is:

$358,400

$534,000

$479,000

621,000

c) Equity financing is:

672,000 shares

714,000 shares

452,000 shares

312,000 shares

c) EPS is:

$0.36

$0.42

$0.17

$0.24

d) DOL is:

1.5

2.49

3.12

2.4

e)DFL is:

2.49

2.81

4.12

3.51

f)DCL is:

3.74

7.89

5.45

8.91