Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Business finance question. Kindly mention all the formula and workings in the answer QUESTION B-4 [13 Marks You are investigating the expansion of your business

Business finance question. Kindly mention all the formula and workings in the answer
image text in transcribed
QUESTION B-4 [13 Marks You are investigating the expansion of your business and have sought out two avenues for the sourcing of funds for the expansion. The first (Plan A) is an all-ordinary-share capital structure. $1 million would be raised by selling 200,000 shares at $5 each. Plan B would involve the use of financial leverage. $800,000 would be raised issuing bonds with an effective interest rate of 15% (per annum). Under this second plan, the remaining $200,000 would be raised by selling 40,000 shares at $5 price per share. The use of financial leverage is considered to be a permanent part of the firm's capitalisation, so no fixed maturity date is needed for the analysis. A 30% tax rate is appropriate for the analysis. REQUIRED: a) Find the EBIT indifference level associated with the two financing plans using an EBIT-EPS graph. Check your results algebraically, (7 marks) b) A detailed financial analysis of the firm's prospects suggests that the long-term earnings before interest and taxes (EBIT) will be $100,000 annually. Taking this into consideration, which plan (2 marks) will generate the higher earnings per share (EPS)? c) Briefly explain the primary weakness of EBIT-EPS analysis as a financing decision tool. (4 marks)

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Bakers Health Care Finance Basic Tools For Nonfinancial Managers

Authors: Thomas K. Ross

6th Edition

1284233162, 978-1284233162

More Books

Students also viewed these Finance questions

Question

How can assertiveness help you cope with anger? Critical T hinking

Answered: 1 week ago