ST122 EBITEPS analysis Newlin Electronics is considering additional financing of $10,000. It currently has $50,000 of 12%
Question:
ST12–2 EBIT–EPS analysis Newlin Electronics is considering additional financing of
$10,000. It currently has $50,000 of 12% (annual interest) bonds and 10,000 shares of common stock outstanding. The firm can obtain the financing through a 12%
(annual interest) bond issue or through the sale of 1,000 shares of common stock.
The firm has a 40% tax rate.
a. Calculate two EBIT–EPS coordinates for each plan by selecting any two EBIT values and finding their associated EPS values.
b. Plot the two financing plans on a set of EBIT–EPS axes.
c. On the basis of your graph in part
b, at what level of EBIT does the bond plan become superior to the stock plan?
Step by Step Answer:
Related Book For
Principles Of Managerial Finance
ISBN: 9780133546408
7th Edition
Authors: Lawrence J Gitman, Chad J Zutter
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