Company B is currently all-equity financed with an EBIT of 45 million per year and generating 15%return per year for the shareholders. Now, the company is considering taking on a new project thatcosts 80 million to start. Once taken, the project will increase Company B’s EBIT by 20 million per year.The tax rate always remains at 40%. The company currently has 20 million shares and can either raise80 million from a VC or borrow 80 million from a bank.a. If the project is financed with equity, the VC asks for 45% of the unlevered equity. What will be theearnings per share (EPS) and the P/E ratio after taking the project?b. If the project is financed with debt, the bank demands 10% interest plus 10 million principalrepayments per year until the loan is paid off. What will be the earnings per share (EPS) and the P/Eratio after taking the project?
Company B is currently all-equity financed with an EBIT of 45 million per year and generating 15%
return per year for the shareholders. Now, the company is considering taking on a new project that
costs 80 million to start. Once taken, the project will increase Company B’s EBIT by 20 million per year.
The tax rate always remains at 40%. The company currently has 20 million shares and can either raise
80 million from a VC or borrow 80 million from a bank.
a. If the project is financed with equity, the VC asks for 45% of the unlevered equity. What will be the
earnings per share (EPS) and the P/E ratio after taking the project?
b. If the project is financed with debt, the bank demands 10% interest plus 10 million principal
repayments per year until the loan is paid off. What will be the earnings per share (EPS) and the P/E
ratio after taking the project?
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