Question

Assume that Atlas Sporting Goods Inc. has $860,000 in assets. If it goes with a low-liquidity plan for the assets, it can earn a return of 17 percent, but with a high-liquidity plan the return will be 14 percent. If the firm goes with a short-term financing plan, the financing costs on the $860,000 will be 11 percent, and with a long-term financing plan the financing costs on the $860,000 will be 13 percent.

If the firm used the most aggressive asset-financing mix described in part a and had the anticipated return you computed for part a, what would earnings per share be if the tax rate on the anticipated return was 30 percent and there were 20,000 shares outstanding?

Answer 1

The earnings per share, first calculate the net income after tax for both the low-liquidity and high-liquidity plans. Then divide the net income by the number of outstanding shares.

Step-by-step explanation:

To calculate the earnings per share, we need to determine the net income after tax. First, we calculate the return on assets for both the low-liquidity plan and the high-liquidity plan.

Low-Liquidity Plan:

Return = Assets * Return Rate = $860,000 * 17% = $146,200

High-Liquidity Plan:

Return = Assets * Return Rate = $860,000 * 14% = $120,400

Next, we calculate the financing costs for both the short-term financing plan and the long-term financing plan.

Short-Term Financing Plan:

Financing Costs = Assets * Financing Rate = $860,000 * 11% = $94,600

Long-Term Financing Plan:

Financing Costs = Assets * Financing Rate = $860,000 * 13% = $111,800

Now, we calculate the net income by subtracting the financing costs from the return for each plan.

Low-Liquidity Plan Net Income:

Net Income = Return - Financing Costs = $146,200 - $94,600 = $51,600

High-Liquidity Plan Net Income:

Net Income = Return - Financing Costs = $120,400 - $111,800 = $8,600

Finally, we calculate the earnings per share by dividing the net income after tax by the number of outstanding shares.

Earnings per Share = (Net Income * (1 - Tax Rate)) / Number of Shares = ($51,600 * (1 - 0.3)) / 20,000 = $36.120