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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
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Dream Corp is comparing two different capital structures: an all-equity plan (Plan A) and a levered plan
(Plan B). Under Plan A, the company would have 160,000 shares of stock outstanding. Under Plan B, there
would be 80,000 shares of stock outstanding and $2.8 million in debt outstanding. The interest on debt is
5.
8%.
If EBIT is $350,000 which plan will result in the higher EPS?
If EBIT is $600,000 which plan will result in the higher EPS?
What is the break-even EBIT for the two plans? Please interpret what the break-even EBIT you find means.
What is meant by business risk and financial risk?
Explain this statement: "The optimal capital structure for a firm is 50% debt and 50% equity."
а.
b.
с.
d.
е.
Transcribed Image Text:Dream Corp is comparing two different capital structures: an all-equity plan (Plan A) and a levered plan (Plan B). Under Plan A, the company would have 160,000 shares of stock outstanding. Under Plan B, there would be 80,000 shares of stock outstanding and $2.8 million in debt outstanding. The interest on debt is 5. 8%. If EBIT is $350,000 which plan will result in the higher EPS? If EBIT is $600,000 which plan will result in the higher EPS? What is the break-even EBIT for the two plans? Please interpret what the break-even EBIT you find means. What is meant by business risk and financial risk? Explain this statement: "The optimal capital structure for a firm is 50% debt and 50% equity." а. b. с. d. е.
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