The Lopez-Portillo Company has $10.6 million in assets, 80 percent financed by debt, and 20 percent financed
Question:
The Lopez-Portillo Company has $10.6 million in assets, 80 percent financed by debt, and 20 percent financed by common stock. The interest rate on the debt is 9 percent and the par value of the stock is $10 per share. President Lopez-Portillo is considering two financing plans for an expansion to $18 million in assets.
Under Plan A, the debt-to-total-assets ratio will be maintained, but new debt will cost a whopping 12 percent! Under Plan B, only new common stock at $10 per share will be issued. The tax rate is 40 percent.
a. If EBIT is 9 percent on total assets, compute earnings per share (EPS) before the expansion and under the two alternatives.
b. What is the degree of financial leverage under each of the three plans?
c. If stock could be sold at $20 per share due to increased expectations for the firm’s sales and earnings, what impact would this have on earnings per share for the two expansion alternatives? Compute earnings per share for each.
d. Explain why corporate financial officers are concerned about their stock values.
Common StockCommon stock is an equity component that represents the worth of stock owned by the shareholders of the company. The common stock represents the par value of the shares outstanding at a balance sheet date. Public companies can trade their stocks on... Par Value
Par value is the face value of a bond. Par value is important for a bond or fixed-income instrument because it determines its maturity value as well as the dollar value of coupon payments. The market price of a bond may be above or below par,...
Step by Step Answer:
a Return on Assets 20 Current Plan A Plan B EBIT 954000 1620000 1620000 Less Interest 763200 a 14736...View the full answer
Foundations of Financial Management
ISBN: 978-1259194078
15th edition
Authors: Stanley Block, Geoffrey Hirt, Bartley Danielsen
