case study

Topics: Stock, Stock market, Shareholder Pages: 5 (315 words) Published: October 15, 2013
Glen Mount

1

Glen Mount Furniture Companny
Case Study 1

Glen Mount

Question 1.

GLEN MOUNT FURNITURE COMPANY
Abbreviated Income Statement
For the Year Ended December 31, 2000

Sales
Less: Fixed Costs
Less: Variable Costs (58% of sales)
Operating Income (EBIT)

$45,500,000

Less: Interest

12,900,000

Earnings before taxes (EBT)

26,390,000

Less taxes (34%)

$ 6,210,000

Earnings after taxes (EAT)
Shares

1,275,000
$ 4,935,000

Earnings per share

1,677,900
$ 3,257,100
2,000,000

Question 2.

Earnings per share in 1999: $1.56
Earnings per share in 2000: $1.63
Earnings per share increased by 4.49%

$

1.63

Glen Mount

3

Question 3.

GLEN MOUNT FURNITURE COMPANY
Abbreviated Income Statement
For the Year Ended December 31, 2000

Sales

Earnings per share in 2000: $1.79

Less: Fixed Costs

Earnings per share increased by 14.74%

Less: Variable Costs (58% of sales)
Operating Income (EBIT)
Less: Interest
Earnings before taxes (EBT)

$45,500,000

Less taxes (34%)

12,900,000

Earnings after taxes (EAT)

26,390,000

Shares

$ 6,210,000

Earnings per share

2,475,000
$ 3,735,000
1,269,900

Question 4.

$ 2,465,100
1,375,000

Earnings per share in 1999: $1.56

$

1.79

Glen Mount

Question 5.

DFL = EBIT / EBIT - I
For question 1: DFL = $6,210,000 / $4,935,000 = 1.26
For question 3: DFL = $6,210,000 / $3,735,000 = 1.66

Question 6.

DCL = (S - TVC) / (S - TVC - FC - I)
For question 1: DCL = $19,110,000 / $4,935,000 = 3.87
For question 3: DCL = $19,110,000 / $3,735,000 = 5.12

Question 7.

Total debt to assets ratio in 1999: 17,500,000 / 40,500,000 = 43.2% Total debt to assets ratio if $10 million of stockholder's equity replaced with debt: 27,500,000 / 40,500,000 = 67.9%

4

Glen Mount

5

Question 8.

If $10 million worth of stockholder's equity is replaced with debt the earnings per share will increase. Since the security analysts consider the earnings performance to be a very important indicator I would say that the price of the shares of stock of Glen Mount Furniture Company will rise. However, in my opinionWhy not do a bit of research instead? a 67.9% of debt financing is rather high, but as long as the interest rate remains fairly low (the interest increase as stated in the text is not that high) the company should be able to sustain this kind of debt without risking any harm to the company or its shareholders. Ke the required rate of return may increase with more debt, since more debt increases the risk and with riskier future CF the discount rate Ke will go up.

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