4-9-Broward Manufacturing

Net income $615,000ROA 10%Interest expense $202,950

Accounts payable and accruals $950,000= 40% debt of invested capital
Broward’s tax rate is 30%. Broward finances with only debt and common
equity, so it has no preferred stock. 40% of its total invested capital is debt,
and 60% of its total invested capital is common equity.
Calculate its
A. Basic earning power (BEP), Earnings before interest and taxes (EBIT)
/Total assets = 10,81,520/61,50,000= 17.59%
B. Return on equity (ROE), and Net income /Common equity
615,000/3,690,000 = 16.67%
C. Return on invested capital (ROIC). EBIT(1 - T) /Total invested capital =
10,81,520x.7= 7,57,064/6159,000 = 12.31 %
D. Important Note: Revised Answer: The answer is revised in the light of
ROA % given in the question which was originally skipped while
attempting during the class consequently changed total assets, total
liabilities and equity values . Please opt this revised version high lighten
with red ink. Rest of the calculations are unchanged
E. ROA (Return on Total Assets) = N. Income/ T. Asset = 10% or $.
615,000/ X = 10% or X = 615,000 x100/10 = 6,150,000

Revised Balance Sheet

T. Assets Liabilities & Equity %

Accounts payable and $950,000
accruals
Other Debts x $1,510,000
Total Debts $2,460,000 40%
Equity* $ 3,690,000 60%
T. Assets (as $ 6,150,000 Total Liabilities & Equity 6,150,000 100
above)
Equity * = $ 6,150,000 x .60 = $ 3,690,000
Broward Manufacturing
Income Statement (Partial)

Amount $ %
Sales
Cost of goods Sold
Gross Profit
Operating Expenses
Earnings Before Interest & Taxes 10,81,520
Interest Expenses 202,950
Earning Before Taxes = 100,000 878570
Income Tax 30% 30,000 263,570
Earning After Taxes 70,000 615,000

Earning before tax – tax amount = Net Income after Tax

X - 30,000 = 70000 ; x = 70,000 + 30,000 = 100,000

Earning After Tax 615,000= if earn before tax income Rs. 1 = x

Tax Rate 0.3 = t

Earning After Taxes ( x- T ) or 1 -.3 = 0.7 = 615,000

Grossing Up = 615,000x100/70 = 878,570 x.3 =263570 ;

878570-263,570 = 615,000 OR

615,000/.70 = 878,570+ 202,950= 10,81,520 ( EBIT )

Debt + Equity = Invested Capital

10,81,520- (30%) 324,456 = 757,064

21-12-20 14-13 Severn Company - New Plant Cost $ 270 Million ( initial investment/outflow)

A. 12% (Interest, per year, half yearly, quarterly, monthly )Bonds ( American term, uk/
pak debentures) issue for $ 270 Million if listed on stock exchange then can be
traded… 12% of 270,000,000= $ 32400,000 per year 0r 324 million
Existing interest expense 15 + 69.75 +32.4 (new) =117.15 Million
B. Common Stock $ 60 each ; No of Common Shares to be sold out:
270,000,000/60 = 4,500,000 + old interest expense 15 + 69.75 =84.75
A. Plan to Finance 12% Bonds
B. Table # 1,

Details I II III
Probability 0.30 0.40 0.03
Sales $ 2,250 $ 2,700 $ 3,150

EBIT 10% of Sales 225 270 315

Interest Expenses (117.15) (117.15) (117.15)
Earning before Tax 107.85 152.85 197.85
Taxes 40% ( 43.14) (61.14) (79.14)
Earnings After 64.71 91.71 118.71
Taxes
No. of Common 20,000,000 20,000,000 20,000,000
shares outstanding
as per Balance
Sheet60,000,000/$
3

EPS 64,710,0000/2 64.710/20=$4.585 64.71/20=$5.93

0,0000,000
=$. 3.235

A. Calculations for Expected EPS & σ for Debt - 12% bonds issue
B. i. Expected EPS under debt - $ 4.585 ( See table 2 below)

= Γ 1.0935 =1.0457
Measuring Risk Co efficient of Variations (CV) =σ/ Expected EPS

1.0457/4.585 =.2281

Table # 2.

State EPS(r) P (r) (r -ṝ) P(r - ṝ)2

0.3 3.235 .3(3.235) (3.235-4.585)= .3(1.8225)= 0.54675
= 0.9705 -1.35
0.4 4.585 .4(4.585)= (4.585-4.585)= 0 .4 (0) = 0
1.834
0.3 5.935 .3(5.935)= (5.935-4.585)=1.35 .3(1.8225)=0.54675
1.7805
Σ 13.755 4.585 1.0935
A/2.Calculations of Two Ratios

i.Debt to Capital Ratio:Total Debt including Bonds/ T. debt + Bonds +

Equity ( T. Debt) 697.50+255 + 270 = 1,222.50/ 1222.50+ 60 =
0.953:1

ii. Time Interest Earned (TIE) = E (EBIT)*/I = $ 270/117.15 =2.305

*Average of EBIT = 225+270+315 = 840/3 =270

 B. Plan to Finance Additional 4,500,000 @ $ 60 Common Shares

Table 3.
Calculations for Expected EPS and σ for Common Stock issue (Table # 3)

i. Expected EPS under Common Share- $ 4.6818

= Γ0.5056 = 0.7111
Measuring Risk Co efficient of Variations (CV) =σ/ Expected EPS

0.7111/ 4.536 = 0.1568

B/2.Calculations of Two Ratios

i.Debt to Capital Ratio:Total Debt /T. debt + Equity

697.50+ 225= 922.50 / 922.50+ 60 = 0.939:1

ii. Time Interest Earned (TIE) = E (EBIT)/I = $ 270/84.75 =3.19 X

Average of EBIT = 225+270+315 = 840/3 =270

Table # 3.
Details I II III
Probability 0.30 0.40 0.03
Sales $ 2,250 $ 2,700 $ 3,150

EBIT 10% of Sales 225 270 315

Interest Expenses(No Change (84.75) (84.75) (84.75)
in old status)
Earning before Tax $140.25 185.25 230.25
Taxes 40% ( 56.10) (74.10) (92.10)
Earnings After Taxes $84.15 111.15 138.15
No. of common shares as 60,000,000/$3= 60,000,000/$3= 60,000,000/$3=
per Balance Sheet 20,000,000 20,000,000 20,000,000
outstanding
Additional No of Shares 270,000,000/60= 270,000,000/60= 270,000,000/60
4,5000,000 4,5000,000 =
4,5000,000
T. No. of Shares 24,5000,000 24,5000,000 24,5000,000
EPS 84,150,000/24,500 111.15/24.5= 138.15/24.5 =
,000= $ 3.435 4.537 $ 5.639

State EPS(r) P (r) (r -ṝ) P(r - ṝ)2

0.3 $ 3.435 3(3.434)= (3.434- 4.536)=1.102- .3(1.12144)= .
1.030 3364
0.4 $ 4.537 .4(4.537)= (4.537- 4.536)=.001 - .4 (.00001) = .
1.815 0000
0.3 $5.638 .3(5.638)= (5.638-4.536)=1.102 .3(1.214)=.3642
1.691
Σ 13.61/3 0.7006
ṝ 4.5366 4.536
14- 13 Table #4- Summary of Plan A & B.
Sr. Parameters Plan A- Plan B-100% Comments
No 12% Bonds Common Shares
Expected EPS $ 4.585 $. 4.6818 A< B- In Plan EPS is not so
1
significantly greater than plan
A.
2 Standard Deviation 1.0457 0.7111 A>B- A with wider deviation
from expected central value
than Plan B.
3 Coefficient of 0.2281 0.1568 A>B- Hence, Plan A has greater
Variations/CV CV value representing more
riskier thanPlan B
4 Debt to Equity 0.953:1 0.939:1 A>B- Plan B has lesser debt
Ratio equity ratio reflecting slightly
higher stake of owners shall be
able to be in the business
affairs.
5 Times Interest 2.305x 3.19 X A<B- Plan B reflecting greater
Earned ability to absorb interest
expense of the business,
From above the analysis is concluded plan B is better .
The brief theoretical part is written hereunder for the benefit of
understanding the concepts of risk and return as questions rose
by class mates. At the end see & observe the bell curves of the
graph explaining the concept of riskiness in terms of standard
deviations with wider value is termed as more riskier and vice
versa.
Expected Rate of Return
The rate of return expected to be realized from an investment;
the weighted average of the probability distribution of possible
results.

Standard Deviationσ

A statistical measure of the variability of a set of observations.The standard

deviation, σ, is a measure of how far the actual return is likely to deviate from the
expected return.

Coefficient of Variation (CV)

It is standardized measure of the risk per unit of return; calculated as the
standard deviation divided by the expected return.

The coefficient of variation shows the risk per unit of return, and it provides a
more meaningful risk measure when the expected returns on two alternatives are
not the same
 15-B-25 . Solution. One of classmate raised the question on product
wise contribution margin role. The question 15-B-25 explains it.
However, there are three requirements A,B, C have been solved for
you. Please Check out calculations. “D” is in addition to, I have added
Product wise Break Even level calculation at the end with titled
additional requirement.

a)

A B C D Total %
Sales Mix Ratio 25.667% 41.333% 19.667% 13.333% 100% 100
Sales $ $38,500 100% 62,000 100% 29,500 100% 20,000 100% $150,00 100
T. Variable Cost 23,100 60% 42,160 68% 23,500 80% 8,000 40% (96,760) 64.51%
Contribution 15,400 40% 19,840 32% 5,900 20% 12,000 60% 53,240 35.49%
Margin (b)
T. Fixed Cost (35,000)
EBIT 18,240
Suppose T. Fixed (8,983) as (14,467) (6,883) (4,667) (35,000)
cost is divided per sales
among 4 products
on Sales mix ratio.
Mix ratio
Product EBIT 6,417 5,373 (117) 7,333
 C. Overall Break Even $ = Fixed Cost/ C/M Ratio = $ 35,000/.3549 = $98,619

Proof:

Sales at Break Even $98,619 100%

T. variable cost 64.51% of (63,619) 64.51%

sales at break even
Contribution Margin $ 35,000 35.49%
T. Fixed Cost (35,000)
EBIT NIL

d. Additional Part -Product Wise Sales Break Even Level& Proof .

A B C D
Break Even $ = $ 8,983/.40 14,467/.32 6,883/.20 =$ 4,667/,60 = $
Fixed Cost/ = $ 22,457 = $45,209 34,415 7,778
C/M Ratio
Proof.
Sales at Break $ 22,457 $45,209 34,415 7,778
Even $
T. Variable ($13,474) (30,742) (27,532) (3,111)
costs
Contribution 8,963 14,467 6,883 4,667
Margin
T. Fixed Cost (8,963) (14,467) (6,883) (4,667)
EBIT NIL NIL NIL NIL
Break Even $$ 22,457 $45,209 34,415 7,778 =Σ$ 109,859

Comparison
Break Even Overall $98,619
Break Even Product wise $ 109,859
 2015 2016 2017 2016- % 2017-2016 %
2015- Rs. Increase
Increase (Decrease)
(Decrease)
Sale 225 374 317 149 66% (57) 57/374 (15%)
149/225
Cost of 167 193 169 26 26/167 16% (24) 24/193 (12%)
Sales