Proposed $8.000 Current $8.000 $0 $8.000 Assets Debt $4.000 Equity Debt/Equity Ratio Shares outstanding Share price 0.00 400 200 $20 $20 EPS and ROE Under Current Structure (unlevered firm) Expected $1200 Recession $400 Expansion $2000 EBIT Interest $400 $1 $1200 $3.00 $2000 $5.00 Net income EPS ROA 5% 15% 25% ROE 5% 15% 25% EPS and ROE Under Proposed Structure (levered firm) Expected $1.200 -$400 $800 $4.00 Recession Expansion $2.000 -$400 $400 -$400 $0 $0 EBIT Interest $1600 $8.00 Net income EPS ROA 5% 15% 25% ROE 20% 40%
Proposed $8.000 Current $8.000 $0 $8.000 Assets Debt $4.000 Equity Debt/Equity Ratio Shares outstanding Share price 0.00 400 200 $20 $20 EPS and ROE Under Current Structure (unlevered firm) Expected $1200 Recession $400 Expansion $2000 EBIT Interest $400 $1 $1200 $3.00 $2000 $5.00 Net income EPS ROA 5% 15% 25% ROE 5% 15% 25% EPS and ROE Under Proposed Structure (levered firm) Expected $1.200 -$400 $800 $4.00 Recession Expansion $2.000 -$400 $400 -$400 $0 $0 EBIT Interest $1600 $8.00 Net income EPS ROA 5% 15% 25% ROE 20% 40%
Cornerstones of Financial Accounting
4th Edition
ISBN:9781337690881
Author:Jay Rich, Jeff Jones
Publisher:Jay Rich, Jeff Jones
Chapter12: Fainancial Statement Analysis
Section: Chapter Questions
Problem 99.2C
Related questions
Question
Financial Leverage, EPS, and
a- In the normal period (EBIT=$1200), calculate the WACC for the levered firm and unlevered firms.
![Proposed
$8.000
Current
$8.000
$0
$8.000
Assets
Debt
$4.000
Equity
Debt/Equity Ratio
Shares outstanding
Share price
0.00
400
200
$20
$20
EPS and ROE Under Current Structure (unlevered firm)
Expected
$1200
Recession
$400
Expansion
$2000
EBIT
Interest
$400
$1
$1200
$3.00
$2000
$5.00
Net income
EPS
ROA
5%
15%
25%
ROE
5%
15%
25%
EPS and ROE Under Proposed Structure (levered firm)
Expected
$1.200
-$400
$800
$4.00
Recession
Expansion
$2.000
-$400
$400
-$400
$0
$0
EBIT
Interest
$1600
$8.00
Net income
EPS
ROA
5%
15%
25%
ROE
20%
40%](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fb5b08ab9-ed28-42a5-903c-29df3170b3c0%2F692bf5f2-6b88-48e4-81c4-666d7b4c3b21%2Fi7zho9p_processed.png&w=3840&q=75)
Transcribed Image Text:Proposed
$8.000
Current
$8.000
$0
$8.000
Assets
Debt
$4.000
Equity
Debt/Equity Ratio
Shares outstanding
Share price
0.00
400
200
$20
$20
EPS and ROE Under Current Structure (unlevered firm)
Expected
$1200
Recession
$400
Expansion
$2000
EBIT
Interest
$400
$1
$1200
$3.00
$2000
$5.00
Net income
EPS
ROA
5%
15%
25%
ROE
5%
15%
25%
EPS and ROE Under Proposed Structure (levered firm)
Expected
$1.200
-$400
$800
$4.00
Recession
Expansion
$2.000
-$400
$400
-$400
$0
$0
EBIT
Interest
$1600
$8.00
Net income
EPS
ROA
5%
15%
25%
ROE
20%
40%
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