Leigh Fibers expects its operating income over the coming year to equal $2.5 million with a standard deviation of $800,000.Leigh must pay interest charges of $1.2 million next year and preferred dividends of $300,000.Leigh's marginal tax rate is 35%.What is the probability that Leigh will have negative EPS next year if its operating income is expected to be normally distributed? (Problem requires normal distribution table.)
A)14.7%
B)5.2%
C)10.6%
D)15.7%

Question

Quizplus · Accepted Answer

Loss level = $1,200,000 + $300,000/(1 - 0.35) = $1,661,538
z = ($1,661,538 - $2,500,000)/$800,000 = -1.048
From Table V, p = 14.7%

Leigh Fibers Expects Its Operating Income Over the Coming Year