FIN 620 Session 4 Homework Assignment Answers

FIN 620 Session 4 Homework Assignment Answers - EPS equal...

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FIN 620 Session 4 Homework Assignment Answers: Session 4: Do problems 16-4, 16-10, and 16-18 16-4. a. Under Plan I, the unlevered company, net income is the same as EBIT with no corporate tax. The EPS under this capitalization will be: EPS = $750,000/240,000 shares EPS = $3.13 Under Plan II, the levered company, EBIT will be reduced by the interest payment. The interest payment is the amount of debt times the interest rate, so: NI = $750,000 – .10($3,100,000) NI = $440,000 And the EPS will be: EPS = $440,000/160,000 shares EPS = $2.75 Plan I has the higher EPS when EBIT is $750,000. b. Under Plan I, the net income is $1,500,000 and the EPS is: EPS = $1,500,000/240,000 shares EPS = $6.25 Under Plan II, the net income is: NI = $1,500,000 – .10($3,100,000) NI = $1,190,000 And the EPS is: EPS = $1,190,000/160,000 shares EPS = $7.44 Plan II has the higher EPS when EBIT is $1,500,000. c. To find the breakeven EBIT for two different capital structures, we simply set the equations for
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Unformatted text preview: EPS equal to each other and solve for EBIT. The breakeven EBIT is: EBIT/240,000 = [EBIT – .10($3,100,000)]/160,000 EBIT = $930,000 16-10. With no taxes, the value of an unlevered firm is the interest rate divided by the unlevered cost of equity, so: V = EBIT/WACC $43,000,000 = EBIT/.11 EBIT = .11($43,000,000) EBIT = $4,730,000 16-18. With no debt, we are finding the value of an unlevered firm, so: V = EBIT(1 – t C )/R V = $15,000(1 – .35)/.17 V = $57,352.94 With debt, we simply need to use the equation for the value of a levered firm. With 50 percent debt, one-half of the firm value is debt, so the value of the levered firm is: V = V U + t C B V = $57,352.94 + .35($57,352.94/2) V = $67,389.71 And with 100 percent debt, the value of the firm is: V = V U + t C B V = $57,352.94 + .35($57,352.94) V = $77,426.47 Sources: http://www.mhhe.com/rwj http://tychousa.umuc.edu...
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FIN 620 Session 4 Homework Assignment Answers - EPS equal...

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