# Operating leverage and forecasting problems

Operating Leverage and Forecasting Problems

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Please complete the following problems and place them in your assignments section by midnight of the last day of the week assigned.  When calculating earnings per share and PE ratios, please show your work.  This problem is similar to the examples shown in the online lecture (found in the course materials forum.

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. Likewise, variable costs are a function of the number of packs sold and the cost to produce each pack. You sell these packs to retailers for 200 dollars each.  In the current 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 and are not part of the 80 dollars per pack manufacturing cost.  The federal income tax rate for your company is 40 percent.

Your company is publicly traded on the NASDAQ with 1,000,000 shares outstanding.

1. Please create a current income statement using the same format as found in the lecture.    (20 points)
2. Please calculate earnings per share. (5 points)
3. Please calculate the price/earnings multiple assuming that the current stock price is 10 dollars per share.  (5 points)

1. Create a two-year forecast of the income statement from the information provided in problem number one.  Please create three columns of data:  current 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.  (20 points)

3.  Please estimate the stock price for year’s two and three, assuming that the current PE multiple remains constant for each of the two forecasted years.  (10 points)