Answered step by step
Verified Expert Solution
Question
1 Approved Answer
Type or paste question here Jinjin's Jewellery Ltd currently has an all equity capital structure with 1,500,000 shares on issue. It is projected that if
Type or paste question here
Jinjin's Jewellery Ltd currently has an all equity capital structure with 1,500,000 shares on issue. It is projected that if normal economic conditions continue, then earnings before interest and tax (EBIT) will be $1,000,000. If economic conditions were to decline into a bust state, then EBIT will be 20% lower than normal. On the other hand, if economic conditions improve, and even boom, then EBIT will be 25% higher than normal. Jinjin is considering a capital restructure involving a debt issue in the amount of $8,000,000. The interest rate on debt is currently 5.5% p.a. The debt will be used to repurchase 800,000 shares at a price $10 per share. Ignore company tax. Required: (Please draw up a table to assist with the calculations and formatting of answer) Current Capital Structure: All Equity $15,000,000 Proposed Capital Structure: Debt $8,000,000 & Equity $7,000,000 Bust Normal Boom Bust Normal Boom EBIT Interest Net Income EBIT Interest Net Income Number of shares on issue Number of shares on issue EPS EPS A. Calculate the earnings per share (EPS) for the current capital structure and the proposed capital structure. (7 marks) B. Calculate the breakeven EBIT and advise Jinjin if the proposed capital structure would be advantageous if EBIT was below the breakeven point? (2 marks)Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started