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
Calculate the EPS for each of the financing alternatives if EBIT is expected to be
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?
Based on the following information on Levered Company, answer these questions:
If sales increase by 10%, what should happen to operating income?
If operating income increases by 10%, what should happen to EPS?
If sales increase by 10%, what should be the effect on EPS?
Sales (100,000 units)
Common shares outstanding
4. Current position of a firm:
Common Stock (600,000shares of $10 par)
Total Capital employed
-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?