A company with EBIT of $5,000,000 is considering two financing alternatives. The first alternative would have $23 million of bonds at 7% interest and 900,000 common shares outstanding, whereas the second would have $45 million of bonds at 7% interest and only 700,000 shares outstanding. The company is in the 35% tax bracket. Required: A. Construct the bottom half of the income statement (including EPS) for each financing alternative when EBIT is at $5,000,000. B. Construct the bottom half of the income statement (including EPS) for each alternative if EBIT increases by 25%. C. Construct the bottom half of the income statement (including EPS) for each alternative if EBIT decreases by 25%.
A company with EBIT of $5,000,000 is considering two financing alternatives. The first alternative would have $23 million of bonds at 7% interest and 900,000 common shares outstanding, whereas the second would have $45 million of bonds at 7% interest and only 700,000 shares outstanding. The company is in the 35% tax bracket. Required: A. Construct the bottom half of the income statement (including EPS) for each financing alternative when EBIT is at $5,000,000. B. Construct the bottom half of the income statement (including EPS) for each alternative if EBIT increases by 25%. C. Construct the bottom half of the income statement (including EPS) for each alternative if EBIT decreases by 25%.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:A company with EBIT of $5,000,000 is considering two financing alternatives. The first
alternative would have $23 million of bonds at 7% interest and 900,000 common shares
outstanding, whereas the second would have $45 million of bonds at 7% interest and only
700,000 shares outstanding. The company is in the 35% tax bracket.
Required:
A. Construct the bottom half of the income statement (including EPS) for each
financing alternative when EBIT is at $5,000,000.
B. Construct the bottom half of the income statement (including EPS) for each
alternative if EBIT increases by 25%.
C. Construct the bottom half of the income statement (including EPS) for each
alternative if EBIT decreases by 25%.
D. What is the EBIT/EPS indifference point for this firm?
A
Alternative #! Alternative #2
EBIT
5,000,000
5,000,000
Interest
1,610,000
3,150,000
Earnings before taxes
3,390,000
1,850,000
Income tax
1,186,500
647,500
Net income
2,203,500
1,202,500
Number of shares outstanding
900,000
700,000
Earnings per share
2.45
1.72
В
Alternative #! Alternative #2
ЕBIT
6,250,000
6,250,000
Interest
1,610,000
3,150,000
Earnings before taxes
4,640,000
3,100,000
Income tax
1,624,000
1,085,000
Net income
3,016,000
2,015,000
Number of shares outstanding
900,000
700,000
Earnings per share
3.35
2.88
Alternative #! Alternative #2
EBIT
3,750,000
3,750,000
Interest
1,610,000
3,150,000
Earnings before taxes
2,140,000
600,000
Income tax
210.000
749,000
1,391,000
Net income
390,000
Number of shares outstanding
900,000
700,000
Earnings per share
1.55
0.56
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