Mr. Gold is in the widget business. He currently sells 1.8 million widgets a year at $5 each. His variable cost to produce the widgets is $3 per unit, and he has $1,580,000 in fixed costs. His sales-to-assets ratio is five times, and 20 percent of his assets are financed with 6 percent debt, with the balance financed by common stock at $10 par value per share. The tax rate is 35 percent.
His brother-in-law, Mr. Silverman, says he is doing it all wrong. By reducing his price to $4.50 a widget, he could increase his volume of units sold by 60 percent. Fixed costs would remain constant, and variable costs would remain $3 per unit. His sales-to-assets ratio would be 7.5 times. Furthermore, he could increase his debt-to-assets ratio to 50 percent, with the balance in common stock. It is assumed that the interest rate would go up by 1 percent and the price of stock would remain constant.
a. Compute earnings per share under the Gold plan. (Round your answer to 2 decimal places.)
Earnings per share $
b. Compute earnings per share under the Silverman plan. (Round your answer to 2 decimal places.)
Earnings per share $