case study
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
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