Question
WinTech Technology Inc. is evaluating two financing options for its new investment of $2,500,000. Option 1: 0% debt Option 2: 60% debt Regardless of how
WinTech Technology Inc. is evaluating two financing options for its new investment of $2,500,000.
Option 1: 0% debt
Option 2: 60% debt
Regardless of how the firm is financed, expected sales and costs are as follows: Sales (units) 22,500 units
Sale price per unit $100.00
Variable cost per unit $ 35.00
Fixed cost $1,000,000
Additional information regarding each option of financing is shown below:
Option1 0% Debt Option 2
0% Debt 60% Debt
New shares issued at $10 per share 250,000 100,000 Debt, $ $0 $1,500,000 Equity, $ $2,500,000 $1,000,000 Interest rate NA 10.00% Tax rate 35% 35%
Required return from equity, Ks 9.25% 14.5%
a) Calculate the earnings per share after the expansion under each financing option. (10 marks) b) Calculate the estimated share price under each financing option using the zero-growth
model. Which financing option should be chosen? Explain.
N.B. Round to the next $1 and use two decimal places for rates of return.
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