Walker's Gunnery, a small-arms manufacturer, has current sales of $10 million and operating income (EBIT) of $450,000. The degree of operating leverage for Walker is 2.5. Next year's sales are expected to increase by 5 percent.
Walker has found that, over time, the standard deviation of operating income is $300,000 and operating income is approximately normally distributed about its expected value in any year. Walker's current financial structure contains both debt and preferred stock.
Interest payments total $200,000, and preferred stock dividends total $60,000. Walker's marginal tax rate is 40 percent. What is the probability that Walker's Gunnery will report negative earnings per share during the coming year?