Zain glassware has made the forecast of sales shown in the following table. Also given is the probability of each level of sales. SalesProbabilityRs. 200,000.20 300,000.60 400,000.20 The firm has fixed operating costs of Rs. 75,000 and variable operating costs equal to the 70% level of sales. The company pays Rs. 12,000 in interest per period. The tax rate is 40%.Compute the earnings before interest and taxes (EBIT) for each level of sales.Compute the earnings per share (EPS) for each level of sales, the expected EPS, the standard deviation of the EPS and the coefficient of variation of EPS, assuming that there are 10,000 shares of common stock outstanding.Zain glassware has the opportunity to reduce its leverage to zero and pay no interest. This will require that the number of shares of common stock outstanding be increased to 15,000. Repeat (b) under this assumption.Compare your findings in (b) and (c) and comment on the reduction of debt to zero on the firm’s financial risk.

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Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter22: Providing And Obtaining Credit

Section: Chapter Questions

Problem 2MC

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Zain glassware has made the forecast of sales shown in the following table. Also given is the probability of each level of sales.

Sales	Probability
Rs. 200,000	.20
300,000	.60
400,000	.20

The firm has fixed operating costs of Rs. 75,000 and variable operating costs equal to the 70% level of sales. The company pays Rs. 12,000 in interest per period. The tax rate is 40%.

Compute the earnings before interest and taxes (EBIT) for each level of sales.
Compute the earnings per share (EPS) for each level of sales, the expected EPS, the standard deviation of the EPS and the coefficient of variation of EPS, assuming that there are 10,000 shares of common stock outstanding.
Zain glassware has the opportunity to reduce its leverage to zero and pay no interest. This will require that the number of shares of common stock outstanding be increased to 15,000. Repeat (b) under this assumption.

Compare your findings in (b) and (c) and comment on the reduction of debt to zero on the firm’s financial risk.

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