Please read and answer the following question. ,,Mr. Katz is the widget business. He currently sells 2 million widgets a year at $4 each. His variable cost to produce the widgets is $3 per unit, and he has $1,500,000 in fixed costs. His sales-to-assets ratio is four times, and 40 percent of his assets are financed with 9 percent debt, with the balance financed by common stock at $10 per share. The tax rate is 30 percent. His brother-in-law Mr. Doberman says Mr. Katz is doing it all wrong. By reducing his prices to $3.75 a widget, he could increase his volume of units sold by 40 percent. Fixed costs would remain constant, and variable cost would remain $3 per unit. His sales-to-assets ratio would be 5 times. Furthermore, he could increase his debt-to-assets to 50 percent, with the balance in common stock. It is assumed that the interest rate would go up by 1 percent and the price of stock would remain constant. ,a. Compute earnings per share under the Katz plan.
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