Question
University Technologies, Inc. (UTI) has a current capital structure consisting of 5 million shares of common stock, $210 million of first-mortgage bonds with a coupon
University Technologies, Inc. (UTI) has a current capital structure consisting of 5 million shares of common stock, $210 million of first-mortgage bonds with a coupon interest rate of 15 percent, and $20 million of preferred stock paying a 4 percent dividend. To expand into Asia, UTI will have to undertake an aggressive capital outlay campaign, expected to cost $210 million. This expansion can be financed either by selling 3 million new shares of common stock at a price of $70 per share or by the sale of $210 million of subordinated debentures at a pretax interest rate of 17 percent. The companys tax rate is 40 percent. Compute the EBIT-EPS indifference point between the equity and debt financing alternatives. Enter your answer in millions. For example, an answer of $1.11 million should be entered as 1.11, not 1,110,000. Round your answer to two decimal places.
$ ___million
If UTI expects next years EBIT to be $150 million with a standard deviation of $15 million, what is the probability that the equity financing option will produce higher earnings per share than the debt financing option? (Assume that EBIT is normally distributed.) Use Table V to answer the question. Round z value in intermediate calculations to two decimal places.
Round your answer to two decimal places.
___ %
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