Neverlever, Inc. Is trying to decide how best to finance a proposed P10 million capital investment. Under Plan A, the project will be financed entirely with long term 9% bonds. The firm currently has no debt or preferred stock. Under Plan B, common stock will be sold to net the firm P20.00 per share; presently one (1) million shares are outstanding. The corporate tax rate is 25%. The company is expected to have an EBIT amounting to P3.0M. Required: 1. What will be the firm’s ROE next year if the firm issues new common stock? 2. What will be the firm’s ROE next year if the firm issues 9% bonded indebtedness?

Neverlever, Inc. Is trying to decide how best to finance a proposed P10 million capital investment. Under Plan A, the project will be financed entirely with long term 9% bonds. The firm currently has no debt or preferred stock. Under Plan B, common stock will be sold to net the firm P20.00 per share; presently one (1) million shares are outstanding. The corporate tax rate is 25%. The company is expected to have an EBIT amounting to P3.0M. Required: 1. What will be the firm’s ROE next year if the firm issues new common stock? 2. What will be the firm’s ROE next year if the firm issues 9% bonded indebtedness?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter14: Capital Structure Management In Practice

Section: Chapter Questions

Problem 20P

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Neverlever, Inc. Is trying to decide how best to finance a proposed P10 million capital investment. Under Plan A, the project will be financed entirely with long term 9% bonds. The firm currently has no debt or preferred stock. Under Plan B, common stock will be sold to net the firm P20.00 per share; presently one (1) million shares are outstanding. The corporate tax rate is 25%. The company is expected to have an EBIT amounting to P3.0M. Required:1. What will be the projected EPS next year if new common shares will be issued?2. What will be the projected EPS next year if 9% bonds will be issued?
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