Here are the two missing problems.

9. Blums, Inc., expects its operating income over the coming year to equal $1.5 million,with a standard deviation of $300,000. Its coefficient of variation is equal to 0.20.Blums must pay interest charges of $700,000 next year and preferred stock dividendsof $240,000. Blums’marginal tax rate is 40 percent. What is the probability thatBlums will have negative earnings per share next year? (Assume that operatingincome is normally distributed.)

9. Loss level of EBIT = Interest plus pretax preferred stock dividends

= $700,000 + $240,000/(1 - .4) = $1,100,000

The probability of negative earnings per share is the probability of having

operating income less than the loss level.

z = ($1,100,000 - $1,500,000)/$300,000

= -1.33 standard deviations

From Table V, p(z < -1.33) = 9.18%

12. Connely, Inc., expects sales of silicon chips to be $30 million this year. Because thisis a very capital-intensive business, fixed operating costs are $10 million. Thevariable cost ratio is 40 percent. The firm’s debt obligations consist of a $2 million,10 percent bank loan and a $10 million bond issue with a 12 percent coupon rate.The firm has 100,000 shares of preferred stock outstanding that pays a $9.60 dividend.Connely has 1 million shares of common stock outstanding, and its marginaltax rate is 40 percent. Compute the following for connely

a. Degree of operating leverage

b. Degree of financial leverage

c. Degree of combined leverage

d. EPS if sales decline by 5 percent

Values in millions of dollars

a. VC = 0.4($30) = $12

EBIT = $30 - $12 - $10 = $8

DOL = ($30 - $12)/$8 = 2.25

b. Interest = [(0.1 x $2) + (0.12 x $10)] = $1.4

DFL = $8/ [$8 - $1.4 - ($0.96/(1 - 0.4)] = 1.6

c. DCL = DOL x DFL = 2.25 x 1.6 = 3.6

d. Current EPS:

EBIT $8.00

Interest 1.40

EBT $6.60

Tax 2.64

EAT and before preferred

dividends $3.96

Preferred dividends 0.96

Earnings available to C.S. $3.00 (million)

EPS $3.00

3.6 = %EPS/-5%

%EPS = -18%

New EPS = $3.00(1 - 0.18) = $2.46