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Required: a. Assuming TOPP maintains its current income level and achieves the expected income from expansion, what will be TOPP's earnings per share: (1) If expansion is financed by debt? (2) If expansion is financed by equity? b. At what level of income before interest and taxes will earnings per share be equal under both alternatives?

Required: a. Assuming TOPP maintains its current income level and achieves the expected income from expansion, what will be TOPP's earnings per share: (1) If expansion is financed by debt? (2) If expansion is financed by equity? b. At what level of income before interest and taxes will earnings per share be equal under both alternatives?

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Please answer Problem 10-12 parts a (1-2) and b.

600 CHECK (a) 1. $6.54 Financial Statement Analysis Required: a. Assuming TOPP maintains its current income level and achieves the expected income from expansion, what will be TOPP's earnings per share: (1) If expansion is financed by debt? (2) If expansion is financed by equity? b. At what level of income before interest and taxes will earnings per share be equal under both alternatives?
Transcribed Image Text:600 CHECK (a) 1. $6.54 Financial Statement Analysis Required: a. Assuming TOPP maintains its current income level and achieves the expected income from expansion, what will be TOPP's earnings per share: (1) If expansion is financed by debt? (2) If expansion is financed by equity? b. At what level of income before interest and taxes will earnings per share be equal under both alternatives?
TOPP Company is planning to invest $20,000,000 in an expansion program expected to increase income before interest and taxes by $4,000,000. TOPP currently is earning $5 per share on 2,000,000 shares of common stock outstanding. TOPP's capital structure prior to the invest- ment is as follows: Total debt..... Shareholders' equity.... Total capitalization.... 00 028r Expansion can be financed by the sale of 400,000 shares at $50 each or by issuing long-term debt at 6%. TOPP's most recent income statement follows: Sales .... $100,000,000 Variable costs.... Fixed costs... Total costs. $20,000,000 50,000,000 $70,000,000 Income before interest and taxes... Interest expense (6% rate). . . . . Income before taxes Income taxes (40% rate). Net income.... ... $60,000,000 20,000,000 ani (80,000,000) 20,000,000 (1,000,000) 19,000,000 (7,600,000) $ 11,400,000 PROBLEM 10-12 Analyzing Alternative Financing Strategies
Transcribed Image Text:TOPP Company is planning to invest $20,000,000 in an expansion program expected to increase income before interest and taxes by $4,000,000. TOPP currently is earning $5 per share on 2,000,000 shares of common stock outstanding. TOPP's capital structure prior to the invest- ment is as follows: Total debt..... Shareholders' equity.... Total capitalization.... 00 028r Expansion can be financed by the sale of 400,000 shares at $50 each or by issuing long-term debt at 6%. TOPP's most recent income statement follows: Sales .... $100,000,000 Variable costs.... Fixed costs... Total costs. $20,000,000 50,000,000 $70,000,000 Income before interest and taxes... Interest expense (6% rate). . . . . Income before taxes Income taxes (40% rate). Net income.... ... $60,000,000 20,000,000 ani (80,000,000) 20,000,000 (1,000,000) 19,000,000 (7,600,000) $ 11,400,000 PROBLEM 10-12 Analyzing Alternative Financing Strategies
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