Howell Enterprises is forecasting EPS of $4.00 per share for next year. The firm

Question

Howell Enterprises is forecasting EPS of $4.00 per share for next year. The firm has 10,000 shares outstanding, it pays 12 percent interest on its debt, and it faces a 40 percent marginal tax rate. Its estimated fixed costs are $80,000 while its variable costs are estimated at 40 percent of revenue. The firm's target capital structure is 40 percent equity and 60 percent debt and it has total assets of $400,000. On what level of sales is Howell basing its EPS forecast?<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

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Explanation / Answer

EPS = $4.00 per share

Total Earning = 4*10000 = $40,000

Add: Income Tax = 40000*.4/0.6 = $26,667

Earning before tax = $66,667

Add: Interest Expenses = $28,800

(400,000*60%*12%)

EBIT = $95467

Add: Fixed Cost = $80,000

Contribution = $175,467

Add: Variable Cost = 175467/0.6 * 40% = $1,16,978

Sales = $292,445

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