Glen Mount Case

1. Project earnings per share for 2000 assuming that sales increase by$500,000. Use figure 3 as the model for the calculation. Further assume that the capital structure is not changed.

GLEN MOUNT FURNITURE COMPANY
Abbreviated Income Statement
For the Year Ended December 31, 1999

|sale |$45,500,000.00 |
|less:Fixed Costs |$12,900,000.00 |
|Less:Variable Costs(58% of sales) |$26,390,000.00 |
|operating income(EBIT) |$6,210,000.00 |
|Less:interst |$1,275,000.00 |
|Earnings before taxes(EBT) |$4,935,000.00 |
|Less:Taxes(34%) |$1,677,900.00 |
|Earnings after taxes(EBT) |$3,257,100.00 |
|Shares |$2,000,000.00 |
|Earnings per share |$1.63 |

2 By what percent did earnings per share increase from 1999 to 2000?
Earning per share increase=(1.63-1.56)/1.56=0.04=4%

3 Now assume that $10 million of debt replaces 625,000 shares of common stock as described in the case. The interest on the new debt will be 11.250 percent. What will projected earnings per share be for 2000 based on the anticipated sales increase of $500,000?

|sale