Empire Industries forecasts net income this coming year as shown below (in thousands of dollars): EBIT $1000
Question:
Empire Industries forecasts net income this coming year as shown below (in thousands of dollars):
EBIT $1000 Interest expense 0 Income before tax 1000 Taxes -350 Net income $650.
Approximately $200,000 of Empire’s earnings will be needed to make new, positive-NPV investments.
Unfortunately, Empire’s managers are expected to waste 10% of its net income on needless perks, pet projects, and other expenditures that do not contribute to the firm. All remaining income will be returned to shareholders through dividends and share repurchases.
a. What are the two benefits of debt financing for Empire?
b. By how much would each $1 of interest expense reduce Empire’s dividend and share repurchases?
c. What is the increase in the total funds Empire will pay to investors for each $1 of interest expense?AppendixLO1
Step by Step Answer:
Corporate Finance The Core
ISBN: 9781292431611
5th Global Edition
Authors: Jonathan Berk, Peter DeMarzo