A company with EBIT of $6,000,000 is considering two financing alternatives. The first alternative would have $25 million of bonds at 8% interest and 1,000,000 common shares outstanding, whereas the second would have $47.5 million of bonds at 8% interest and only 750,000 shares outstanding. The company is in the 35% tax bracket. Required: Part 1: Construct the bottom half of the income statement (including EPS) for each financing alternative when EBIT is at $6,000,000. Part 2: Construct the bottom half of the income statement (including EPS) for each alternative if EBIT increases by 20%. Part 3: Construct the bottom half of the income statement (including EPS) for each alternative if EBIT decreases by 20%. Part 4: What is the EBIT/EPS indifference point for this firm?
A company with EBIT of $6,000,000 is considering two financing alternatives. The first alternative would have $25 million of bonds at 8% interest and 1,000,000 common shares outstanding, whereas the second would have $47.5 million of bonds at 8% interest and only 750,000 shares outstanding. The company is in the 35% tax bracket. Required: Part 1: Construct the bottom half of the income statement (including EPS) for each financing alternative when EBIT is at $6,000,000. Part 2: Construct the bottom half of the income statement (including EPS) for each alternative if EBIT increases by 20%. Part 3: Construct the bottom half of the income statement (including EPS) for each alternative if EBIT decreases by 20%. Part 4: What is the EBIT/EPS indifference point for this firm?
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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A company with EBIT of $6,000,000 is considering two financing alternatives. The first alternative would have $25 million of bonds at 8% interest and 1,000,000 common shares outstanding, whereas the second would have $47.5 million of bonds at 8% interest and only 750,000 shares outstanding. The company is in the 35% tax bracket.
Required:
Part 1: Construct the bottom half of the income statement (including EPS) for each financing alternative when EBIT is at $6,000,000.
Part 2: Construct the bottom half of the income statement (including EPS) for each alternative if EBIT increases by 20%.
Part 3: Construct the bottom half of the income statement (including EPS) for each alternative if EBIT decreases by 20%.
Part 4: What is the EBIT/EPS indifference point for this firm?
Transcribed Image Text:3
Alternative Alternative
4
11
#2
6
Part 1 EBIT
7
Interest
8
EBT
Income Tax
10
Net Income
11
Number of shares
12
EPS
13
14
15
Part 2 EBIT
16
Interest
17
EBT
18
Income Tax
19
Net Income
20
Number of shares
21
EPS
22
23
24
Part 3 EBIT
25
Interest
26
EBT
27
Income Tax
28
Net Income
29
Number of shares
30
ЕPS
31
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