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Levered Company Inc. intends to raise $5 million for plant expansion The company has an option of financing by way of either an equity issue
Levered Company Inc. intends to raise $5 million for plant expansion The company has an option of financing by way of either an equity issue (new shares) by selling shares at $50 per share or through a bond issue (debt financing) bearing an annual interest of 10%. The company's current capital structure consists of $20,000,000 in debt bearing 8% interest and $25,000,000 in equity. The company's recent income statement is: Operating profit $10,000,000 Interest expense $1,600,000 Earnings before tax $8,400,000 Income tax @ 30% $2.520,000 Net income $5,880,000 EPS (500,000 shares) $11.76 New capital injection will increase company's operating profits by 10% For each proposed capital structure (equity issue & bond issue), determine EPS (4 MARKS), ROE (2 MARKS) and Times Interest Earned (2 MARKS) Listen Based on the same instructions for Levered Company Inc., a- What advantage did the company gain through debt financing? (1 MARK) b- What is a disadvantage of debt financing? (1 MARK) 1 A
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