Your corporation is currently all-equity financed with 400,000 shares of common stock selling for $32 a share.

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Your corporation is currently all-equity financed with 400,000 shares of common stock selling for $32 a share. Currently your firm generates $4,000,000 in EBIT annually and has a 29% dividend payout ratio. Your firm’s tax rate is 21%.

a. What is your firm’s current earnings per share and dividend per share?

b. Your firm is considering financing an expansion with an $8,000,000 bond issue that will pay 6.2% annually in interest. If the expansion increases your firm’s EBIT to $6,500,000, but it does not increase the stock price, what will be your firm’s new debt-to-equity ratio, EPS, and dividend per share?

c. If the expansion is instead financed with an issue of new stock, what will be your firm’s new EPS and dividend per share?

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Principles Of Managerial Finance

ISBN: 9781292400648

16th Global Edition

Authors: Chad Zutter, Scott Smart

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