{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

Chapter 14-Capital Structure Examples

Chapter 14-Capital Structure Examples - Example 1 Capital...

Info iconThis preview shows pages 1–5. Sign up to view the full content.

View Full Document Right Arrow Icon
Example 1 - Capital Structure Your company has sales of $1,000,000 ($10 per unit), variable costs of $600,000, fixed costs of $200,000, and EPS of $2.25. If the firm’s degree of financial leverage is equal to 1.2, then what will be the projected EPS, assuming a 10% increase in sales and no change in the firm’s balance sheet (i.e., assets, liabilities, and the number of shares outstanding remain constant).
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Example 1 - Capital Structure [($10 - $6)(100,000)] [($10 - $6)(100,000) - $200,000] DOL = 2.0 DTL = DOL * DFL = (2.0) (1.2) = 2.4 % EPS = (10%) (2.4) = 24% Projected EPS = ($2.25) (1.24) = $2.79 DOL =
Background image of page 2
Example 2 - Capital Structure Your company is an all-equity firm with 300,000 shares outstanding. The company’s EBIT is $2,500,000, and EBIT is expected to remain constant over time. The company pays out all of its earnings each year, so its earnings per share equals its dividends per share. The company’s tax rate is 40 percent.
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Example 2 - Capital Structure The company is considering issuing $5 million worth of bonds (at par) and using the proceeds for a stock repurchase. If issued, the bonds would have an estimated yield to maturity of 8 percent.
Background image of page 4
Image of page 5
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}