case study

Glen Mount

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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

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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%

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Question 8.

If $10 million worth of stockholder's equity is replaced with debt the earnings per share will increase. Since the security