Company ABC is planning a $4,000,000 expansion this year. The expansion can be financed by issuing either common shares of bonds. The new common share can be sold for $5 per share. The bonds can be issued with a 12% coupon rates. The firm’s existing preference share pay dividends of $2 per share. The company’s corporate income tax is 30%. The financial statement of Company ABC is as follow:- Balance Sheet as at 31st December 2021 Current Assets $2,000,000Fixed Assets $8,000,000 $10,000,000 Current Liabilities $1,500,000Bonds:(8.5%, $1,000 par value) $4,000,000(9%, $1,000 par Value) $1,000,000 Preference Shares($100 par value) $500,000 Ordinary Shares($2 par value) $2,400,000Retained Earnings $600,000 $10,000,000a)Calculate the indifference level of EBIT between the two Plans. b)If EBIT is Expected to be $1,500,000 which plan will result in a high EPS?
Company ABC is planning a $4,000,000 expansion this year. The expansion can be financed by issuing either common shares of bonds. The new common share can be sold for $5 per share. The bonds can be issued with a 12% coupon rates. The firm’s existing
Current Assets $2,000,000
Fixed Assets $8,000,000
$10,000,000
Current Liabilities $1,500,000
Bonds:
(8.5%, $1,000 par value) $4,000,000
(9%, $1,000 par Value) $1,000,000
Preference Shares
($100 par value) $500,000
Ordinary Shares
($2 par value) $2,400,000
$10,000,000
a)Calculate the indifference level of EBIT between the two Plans.
b)If EBIT is Expected to be $1,500,000 which plan will result in a high EPS?
Earnings per share-
Earnings per share (EPS) is a financial term that measures a company's ability to create net profits for each common share.
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