CapStr Exercises - Name Matric No 1 Suppose your company...

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Name: Matric No.: 1. Suppose your company has 800,000 shares of common stock outstanding, no debt, and a marginal tax rate of 40%. You need $6,000,000 to finance a proposed project. You are considering two options: Sell 200,000 shares of common stock at $30 per share Borrow $6,000,000 by issuing 10% bonds a) Calculate the EPS for each of the financing alternatives if EBIT is expected to be i) $2,000,000 ii) $4,000,000 b) Comment on the results of EPS in (a). What is the breakeven EBIT where neither is better than the other? 2. A firm can finance its expansion by selling either $5,000,000 of 8% coupon bonds or $5,000,000 of equity at $20 per share. There are 1 million of shares outstanding. Taxes are 37%. What is the Break-even EBIT? 3. Based on the following information on Levered Company, answer these questions: a) If sales increase by 10%, what should happen to operating income? b) If operating income increases by 10%, what should happen to EPS? c) If sales increase by 10%, what should be the effect on EPS? Sales (100,000 units) $1,400,000 Variable Costs $800,000 Fixed Costs $250,000 Interest paid $125,000 Tax rate 34% Common shares outstanding 100,000 4. Current position of a firm: Capital: Debt 0 Common Stock (600,000shares of $10 par) $6,000,000 Total Capital employed $6,000,000 EBIT $2,000,000 Tax 40% Recapitalization Exercise: -To retire common stocks, until its capital is 40% debt -Borrowing cost at 10% interest -Common stock can be repurchased at $10 per share What is the current and new EPS? 1
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5. Current Information (All Equity firm) Common stock outstanding (par value $1.00) $1,000,000 EBIT $2,000,000 Tax 40% Market price of common stock $7.50 Recapitalization Exercise: To Issue $1,500,000 10% semi-annual coupon bonds, proceeds to be used to retire common stock.
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