Question
(EBIT-EPS analysis) A group of retired college professors has decided to form a small manufacturing corporation. The company will produce a full line of traditional
(EBIT-EPS analysis)
A group of retired college professors has decided to form a small manufacturing corporation. The company will produce a full line of traditional office furniture. The investors have proposed two financing plans. Plan A is an all-common-equity alternative. Under this agreement, 1 million common shares will be sold to net the firm $ 15 per share. Plan B involves the use of financial leverage. A debt issue with a 20-year maturity period will be privately placed. The debt issue will carry an interest rate of 15 percent, and the principal borrowed will amount to $2.25 million. The corporate tax rate is 41 percent.
a. Find the EBIT indifference level associated with the two financing proposals.
b. Prepare an analytical income statement that proves EPS will be the same regardless of the plan chosen at the EBIT level found in part (a).
c. Prepare an EBIT-EPS analysis chart for this situation.
d. If a detailed financial analysis projects that long-term EBIT will always be close to
$2.75 million annually, which plan will provide for the higher EPS?
a. What is the EBIT indifference level associated with the two financing proposals?
$ (Round to the nearest dollar.) ANSWER:
b. Fill in the blanks in the following income statement for plan A. Round the EPS to two decimal places and all other items to the nearest dollar.
| PLAN A | |||
| EBIT | $ (Type a whole number) ANSWER: | ||
|
|
| ||
| Less: Interest expenses | $ (Round to the nearest dollar.) ANSWER: | |
| Earnings before taxes (EBT) | $ (Round to the nearest dollar.) ANSWER: | |
| Less: Taxes at 41 % $ (Round to the nearest dollar.) ANSWER: |
|
| |
| Divide: Number of common shares | nothing (Type a whole number.) ANSWER: |
| Earnings per share (EPS) | $ (Round to the nearest cent.) ANSWER: | |
Fill in the blanks in the following income statement for plan B. Round the EPS to two decimal places and all other items to the nearest dollar.
| PLAN B | |||
| EBIT | $ (Type a whole number.) ANSWER: | ||
|
|
| ||
| Less: Interest expenses | $ (Round to the nearest dollar.) ANSWER: | |
| Earnings before taxes (EBT) | $ (Round to the nearest dollar.) ANSWER: | |
| Less: Taxes at 41 % $ (Round to the nearest dollar.) ANSWER: |
|
| ||
| Net income | $ (Round to the nearest dollar.) ANSWER: | |
|
| |
| Divide: Number of common shares | (Type a whole number.) ANSWER: |
|
| ||
| Earnings per share (EPS) | $ (Round to the nearest cent.) ANSWER: | |
|
THIS IS ALL ONE ANSWER!! |
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