ABC Limited is an all-equity firm and has a present capital structure of 10 million shares of common stock, which trades at $12 per share. The company is contemplating an expansion programme that requires a capital cost of $18 million. Two alternative financing plans are under consideration: Plan 1-(Equity financing). Sale of 1.5 million additional shares of common stock. Plan 2 (Debt financing). Issue $18.0 million in 12% Long-term debt. The firm’s marginal rate of tax is 35 percent. You are required to: a. Determine the break-even EBIT, given the two financing plans. b. Suppose ABC Limited’s EBIT is likely to be $24 million. Which alternative financing plan would you recommend, assuming you want to maximize EPS?
ABC Limited is an all-equity firm and has a present capital structure of 10 million shares of
common stock, which trades at $12 per share. The company is contemplating an expansion
programme that requires a capital cost of $18 million. Two alternative financing plans are
under consideration:
Plan 1-(Equity financing). Sale of 1.5 million additional shares of common stock.
Plan 2 (Debt financing). Issue $18.0 million in 12% Long-term debt.
The firm’s marginal rate of tax is 35 percent.
You are required to:
a. Determine the break-even EBIT, given the two financing plans.
b. Suppose ABC Limited’s EBIT is likely to be $24 million. Which alternative financing
plan would you recommend, assuming you want to maximize EPS?
Trending now
This is a popular solution!
Step by step
Solved in 3 steps with 4 images
