Question
1) Currently the firm has 1 million shares outstanding, each sells for $20, total worth of shares: $20 million. It has assets (buidings, equipment, patents
1) Currently the firm has 1 million shares outstanding, each sells for $20, total worth of shares: $20 million. It has assets (buidings, equipment, patents etc) worth $20 million. All financed by shares (called equity) and no debt. The firm is considering a new investment project costing $20 million thus bringing its total worth to $40 million. Three different method of financing are considered: (1) all equity (2) half equity half debt (3) all debt. Assuming Return on Assets (ROA) next year will turn out to be 10%, calculate Earnings per Share (EPS) under the three different financing packages. Show your work by filling in the BLANK cells. Debt carries an interest rate of 20%. (25 points)
Package1 | Package2 | Package3 | |
Assets (mill) | $40 | $40 | $40 |
Debt | $10 | ||
Equity | $20 | ||
Number of shares (mill) | |||
Debt/Equity Ratio | 33% |
Package1 | Package2 | Package3 | |
Operating Earn. (mill) | $4 | ||
Interest expense (mill) | $2 | ||
Earnings for owners (mill) | $4 | ||
Number of shares (mill) | 2 | 1,5 | 1 |
Earnings per share | $2 | $1,33 | $0 |
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