Intro Unibloc Inc. currently sells 5.4 million construction set toys per year at a price of $39.95 each. The company has $13.9 million in debt with an average coupon rate of 6% and 15 million shares outstanding, which trade at $47.72. The company's average tax rate is 29%. The company plans to modernize its production process. The new machines will cost $8.3 million and will reduce the variable cost per unit to $29.96, while increasing fixed costs, including depreciation, to $18.4 million. Sales will be unaffected. They company could rais $8.3 million by borrowing at an interest rate of 6% or by selling more shares at the current stock price. Part 1 IB Attempt 3/10 for 10 pts. What would be EPS if the investment is financed with debt? Correct v New interest expenses: 11 = (Do + AD) * i = (13.9 + 8.3) * 0.06 = 1.332 Net income with debt financing: Nip = ((P-V1) Q - F1 - 11) (1-t) = ((39.95-29.96) 5.4 - 18.4 - 1.332) (1-0.29) = 24.28 Earnings per share: EPSD = NID / No = 24.28 / 15 = 1.619 Part 2 IB Attempt 1/10 for 10 pts. What would be EPS if the investment is financed with equity? Correct v Initial interest expenses: lo = Do * i = 13.9 * 0.06 = 0.834 New number of shares outstanding after issuing more equity: Ne = No + Investment / Po = 15 +8.3/47.72 = 15.17 Net income with equity financing: NIE = ((P-V1) Q - F1 - lo) (1-t) = ((39.95-29.96) 5.4 - 18.4 -0.834) (1-0.29) = 24.64 Earnings per share: EPSE = NIE / NE = 24.64 / 15.17 = 1.624 Part 3 1B | Attempt 1/10 for 10 pts. What number of units sold will lead to the same EPS with debt financing and equity financing (in million)? 3,062,623.30 Try again Try again See solution (-2 pts.)