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Chapter 14-Capital Structure Examples

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

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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).

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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 =
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.

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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.
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