Operating Leverage and Forecasting Problems
Operating Leverage and Forecasting Problems
Please complete the following problems. When calculating earnings per share and PE ratios, please show your work. This problem is similar to the examples shown in the lecture.
1. You manufacture hunting pack systems in China for 80 dollars each, including shipping. The manufacturing costs only include variable costs. Variable costs are not calculated as a percentage of sales in this case.
Sales are a function of the number of packs sold and the price per pack.. You sell these packs to retailers for 200 dollars each. In the cu
ent year you will sell 100,000 packs.
Your fixed costs including such items as insurance, marketing, travel, shows, office supplies, warehouse rentals etc. totals 5 million dollars this year.
The federal income tax rate for your company is 40 percent.
When calculating the variable costs please do not use the ten percent of sales assumption from the week five online lecture examples. Each company has its own variable costs. Calculate the variable costs from the data given in this homework assignment.
Your company is publicly traded on the NASDAQ with 1,000,000 shares outstanding.
a. Please create a cu
ent income statement using the same format as found in the lecture XXXXXXXXXXpoints)
. Please calculate earnings per share. (10 points)
c. Please calculate the price/earnings multiple assuming that the cu
ent stock price is 10 dollars per share. (10 points)
2. Create a two-year forecast of the income statement from the information provided in problem number one. Please create three columns of data: cu
ent year, year 2, and year 3. Assume that sales increase ten percent per year for year’s two and three. Please show the earnings per share for each of the three years. (40 points)
XXXXXXXXXXPlease estimate the stock price for year’s two and three, assuming that the cu
ent PE multiple remains constant for each of the two forecasted years. (20 points)
Clearly show the problem numbers for each problem, such as 1a, 1b,1c, 2, and 3. This makes it possible to grade your assignment.