Glen Mount Furniture Company
Resolved Question:
The firm was considering buying back 625,000 shares of stockoutstanding at $16 per share. This would represent $10 million in total. The funds to purchase the shares would be acquired from a new bond issue that would carry an interest rate of 11.25 percent. The bond would have a 15-year life. The firm was in a 34 percent tax bracket.
Figure 1 Earnings per share for the last five years
Year 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr Yearly total
2003 $.23 $.25 $.19 $.34 $1.01
2004 .26 .28 .27 .41 1.22
2005 .34 .36 .33 .48 1.51
2006 .35 .37 .34 .49 1.55
2007 .35 .36 .36 .49 1.56
Figure 2 Glen Mount Furniture Company
Current Balance Sheet
Dec.31,2008
Assets
Current assets:
Cash $350,000
Marketable securities 90,000
Accounts receivable 5,000,000
Inventory 7,000,000
Total current assets 12,440,000
Other assets:
Investments 5,000,000
Fixed assets:
Plant and equipment 27,060,000
Less: Accumulated depreciation 4,000,000
Net plant and equipment 23,060,000
Total assets 40,500,000
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $4,400,000
Wages payable 150,000
Accrued expenses 950,000
Total current liabilities 5,500,000
Long term liabilities
Bonds payable,10.625% 12,000,000
Stockholders' equity
Common stock, $1 par value, 2,000,000 shares 2,000,000
Capital in excess of par 8,000,000
Retained earnings 13,000,000
Total stockholders' equity 23,000,000
Total liabilities and Stockholders' equity 40,500,000
Figure 3 Glen Mount Furniture Company
Abbreviated Income Statement
For the Year Ended Dec. 31,2008
Sales $45,000,000
Less: Fixed costs 12,900,000
Less: Variable costs (58% of sales) 26,100,000
Operating income (EBIT) $6,000,000
Less: Interest 1,275,000
Earnings before taxes (EBT) $4,725,000
Less: Taxes (34%) 1,606,500
Earnings after taxes (EAT) $3,118,500
Shares 2,000,000
Earnings per share $1.56
Required
1. Project earnings per share for 2009 assuming that sales
The firm was considering buying back 625,000 shares of stockoutstanding at $16 per share. This would represent $10 million in total. The funds to purchase the shares would be acquired from a new bond issue that would carry an interest rate of 11.25 percent. The bond would have a 15-year life. The firm was in a 34 percent tax bracket.
Figure 1 Earnings per share for the last five years
Year 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr Yearly total
2003 $.23 $.25 $.19 $.34 $1.01
2004 .26 .28 .27 .41 1.22
2005 .34 .36 .33 .48 1.51
2006 .35 .37 .34 .49 1.55
2007 .35 .36 .36 .49 1.56
Figure 2 Glen Mount Furniture Company
Current Balance Sheet
Dec.31,2008
Assets
Current assets:
Cash $350,000
Marketable securities 90,000
Accounts receivable 5,000,000
Inventory 7,000,000
Total current assets 12,440,000
Other assets:
Investments 5,000,000
Fixed assets:
Plant and equipment 27,060,000
Less: Accumulated depreciation 4,000,000
Net plant and equipment 23,060,000
Total assets 40,500,000
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $4,400,000
Wages payable 150,000
Accrued expenses 950,000
Total current liabilities 5,500,000
Long term liabilities
Bonds payable,10.625% 12,000,000
Stockholders' equity
Common stock, $1 par value, 2,000,000 shares 2,000,000
Capital in excess of par 8,000,000
Retained earnings 13,000,000
Total stockholders' equity 23,000,000
Total liabilities and Stockholders' equity 40,500,000
Figure 3 Glen Mount Furniture Company
Abbreviated Income Statement
For the Year Ended Dec. 31,2008
Sales $45,000,000
Less: Fixed costs 12,900,000
Less: Variable costs (58% of sales) 26,100,000
Operating income (EBIT) $6,000,000
Less: Interest 1,275,000
Earnings before taxes (EBT) $4,725,000
Less: Taxes (34%) 1,606,500
Earnings after taxes (EAT) $3,118,500
Shares 2,000,000
Earnings per share $1.56
Required
1. Project earnings per share for 2009 assuming that sales