7. XYZ Co. has an existing capital structure of 1 million shares of S10 each and is subject to

a tax rate of 50%. XYZ Co. plans to raise additional capital of $10 million for financing an

expansion project. In this context XYZ Co, is evaluating two alternative financing plans:

(i) issue of equity shares (1 million equity shares of $10 per share), and (if) issue of

debentures carrying 14% interest.

a) What will be the EPS under the two alternative financing plans for two levels of

EBIT, say S4 million and $2 million?

b) Calculate the financial break-even point

8.

Delta Co. has 2 scenarios to finance its new investment that requires $25 million. The first

one is to issue 2 million shares, the second one is to issue bonds; coupon rate 10%. The

current capital structure contains 10 million shares and bonds that its annual interest is $8

million. The fixed costs are $40 million and the variable costs are 50% of sales.

a) Compute the financial break-even point.

b) If the expected sales are S million, which alternative should Delta choose to

finance its new investment