Question
You are evaluating two financing plans for your client. After meeting their CFO you gathered the following information. Current operations (All $ figures are in
You are evaluating two financing plans for your client. After meeting their CFO you gathered the following information.
Current operations (All $ figures are in 000 so $1,000 means $1Million)
- The company has $1,000 of Sales. It is estimated that the Variable costs are 10% of the revenues.
- The company is capital intensive and currently have Fixed costs of $600.
- In addition, interest expense on the current debt is $100 and the applicable tax rate is 40%
Future Plans
- It is estimated that the future plan will result in an expected growth rate of 20% (Use that fact for part b only )
- The company decided to go ahead with the plan and is evaluating two possible financing plans
- Plan A removing all finance charges repay all the debt and finance exclusively through equity
- Plan B maintain the existing leverage structure
Required
a/ Calculate the Operating Income , Profit before tax , DOL , DFL , DCL and Net profit under both plans using this years numbers
b/ Based on the fact that the expected growth rate of 20% Calculate the Operating Income , Profit before tax , DOL , DFL , DCL and Net profit under both plans
c/ What would be the difference on the Earnings Per Share - EPS under both plans if the company has 100,000 common shares outstanding.
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