Answered>Order 1197

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 dividends of $240,000. Blums’ marginal tax rate is 40 percent. What is the probability that Blums will have negativeearnings per share next year? (Assume that operating income is normally distributed.)

Loss level of EBIT = (Interest + 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…