PLEASE EXPLAIN TO ME ON HOW THE COLORED(RED) MARKED AREA ON THE PICTURE IS SOLVED ON THE PICTURE. ALL THE GIVEN IS PROVIDED. MUCH APPRECIATED THANKS. Assessing Long-term Debt, Equity and Capital Structure 625Illustrative Case 24-2. Financing Expansion ProgramLamina Equipments Company's current capital structure consists of 8% debtwith a market value and book value of P4,000,000 and 200,000 shares ofoutstanding common stock with a market value of P15,000,000. The firm isconsidering a P6,000,000 expansion program using one of the followingfinancing plans.Plan I: Sell additional debt at 10% interestPlan II: Sell preferred shares with a 10.5% dividend yieldPlan III: Sell new ordinary equity securities at P150 per shareThe corporate tax rate is 34%. Ignore flotation costs.(a) If the expected level of EBIT after the expansion is P2,500,000, the EPS foreach financing plan is calculated as follows:BOOK VALUE 5% CAMINA CURRENT CAPITAL CONSISTS OF.L- 8% PEST4MXSEEBIT SELL APPE DEBT AT 10% INTERESTLess: Interest on existing debtEXPANSION 6MX10h Interest on new debtPROGAMTotalOrdinary Equity SharesEarnings per sharePROGRAMPlan IDebtP2,500,000Earnings before taxesLess: Income taxes (Earnings befmx-537,200-Net incomeP1,042,800CORPORATE THY EX 34Dividends - Preferred shares GMX 10Earnings available to common O YSELDshareholdersP2,500,000320,000NO ADR4 DG BT = 0320,000P1,580,000 EPT P2,180,000 ET+37741,200P1,438,800630,000Plan II = P320,000+←Plan III= P320,000320,000600,000920,000GIVEN SHIPSP1,042,800<-200,000Plan IIPreferredShares630,000(1-.34).66P 808,800200,000P4.04Plan IIIOrdinaryEquityShares= P1,274,545P2,500,000320,000NADD+ DEST320,000P2,180,000741,200P1,438,800P5.2)↑-DECIMAL PLACESThe financial break-even point is the level of EBIT at the firm's EPS equals zero.Plan I = P920,000P1.438.800280.000P5.14MAKET VALUE1SMSHARES 200K0рарабор расивам ст75= 280,00075 MARKET PRICEPER SHARE80,000+ 200,00SHARES EPS.Mathematically, the indifference poim can be found by solving for ED..a) EPS (debt) = EPS (Ordinary equity share)P000's(EBIT-P920) (1.34) - PO(EBIT-P920) (.66) - POCross multiplying:POOO'S200200Cross multiplying:by the same margin throughout the EBIT andX)(P280) (.66 EBIT-P607.20)184.8 EBIT-P170,016 =1848-132 =P000's920×0.66(EBIT-P320) (1.34)- P630200P2,420 (in thousands)or P2,420.000b) EPS (Preferred shares) = EPS (Ordinary equity share)PO00's(EBIT-P320) (1 -.34) - PO140.28052.8 EBIT = P127,776EBIT =аха320 x 0.66↓(P200) (.66 EBIT - P211.20)132 EBIT-P42,240 607. 20- 1948x100 42,(P280) (.66 EBIT-P211.20-P630)(EBIT-P320) (.66) - POV280(EBIT-P320) (1-.34) - PO184.8 EBIT-P235,536 =52.8 EBITEBIT280(P200) (.66 EBIT-P211.20)132 EBIT-P42,240P193,296P3,660,900Plan I (debt) is tavered over Plan II (preferred share) at all levels of EBIT Plan Iis favored over Plan III (orainary cquityindifference point of P2,420,000.Lare) when EDITis above the

Earnings per share is one of the main valuation metrics that investors use to evaluate the value and…

Lamina Equipments Company's current capital structure consists of 8% debt with a market value and book value of P4,000,000 and 200,000 shares of outstanding common stock with a market value of P15,000,000. The firm is considering a P6,000,000 expansion program using one of the following financing plans. Plan I: Sell additional debt at 10% interest Plan II: Sell preferred shares with a 10.5% dividend yield Plan III: Sell new ordinary equity securities at P150 per share The corporate tax rate is 34%. Ignore flotation costs. (a) If the expected level of EBIT after the expansion is P2,500,000, the EPS for each financing plan is calculated as follows: VALUE 5% CAMINA CURRENT CAPITAL CONSISTS OF.L- 8% PEST EBIT SELL APPE DEBT AT INTEREST Less: Interest on existing debt - 6M+1h Interest on new debt Total Dividends - Preferred shares GMX 10 Earnings available to common shareholders Earnings before taxes Less: Income taxes (Earnings besme Tax 537,200- Net income CORPORATE THY AX 341 P1,042,800 Ordinary Equity Shares Earnings per share Plan I = P920,000 Plan II = PROGRAM Plan III= P320,000 Plan II Preferred Shares P2,500,000 320,000 320,000 600,000 NO ADR4 DG BT= 0 920,000 320,000 320,000 P1,580,000 EPT P2,180,000 ET P2,180,000 +37741,200 741,200 P1,438,800 P1,438,800 630,000 Plan I Debt P2,500,000 P320,000+ SPONDYSELD P1,042,800 <-200,000 GIVEN SHAPS P5.2) ↑ The financial break-even point is the level of EBIT at the firm's EPS equals zero. 2 DECIMAL PLACES P 808,800 200,000 P4.04 630,000 (1-.34).66 Plan III Ordinary Equity Shares P2,500,000 320,000 = P1,274,545 NADD+ DEST PL.438.800 280.000. P5.14 MAKET VALUE 1SM SHARES 200K 0 EXPASION PROGRAMM 75 = 200,000 75 MARKE DEK 80,000 SAMP

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

Section: Chapter Questions

Problem 1PS