The Morton Company is planning to invest \(\$ 10,000,000\) in an expansion program which is expected to increase earnings before interest and taxes by \(\$ 2,500,000\). The company currently is earning \(\$ 5\) per share on \(1,000,000\) shares of common outstanding. The capital structure prior to the investment is:

{Required:}
Assuming the firm maintains its current earnings and achieves the anticipated earnings from the expansion, what will be the earnings per share if the expansion is financed by

(a) debt?

(b) equity?

Transcribed Image Text:

Debt Equity .$ 10,000,000 30,000,000 $ 40,000,000 The expansion can be financed by sale of 200,000 shares at $50 net each or by issuing long-term debt at a 6 percent interest cost. The firm's recent profit and loss statement was as follows: Sales Variable cost. Fixed cost $101,000,000 $60,000,000 30,500,000 Earnings before interest and taxes............ Interest Earnings before taxes. Taxes (50%) Earnings after taxes. 90,500,000 .$ 10,500,000 500,000 $ 10,000,000 5,000,000 $ 5,000,000