The Blue Boat Company currently has 2 million shares of common stock outstanding, along with RM 5 million in 10% bonds. The firm is considering a RM 10 million expansion program which will be financed with either: (1) all common stock at RM 50 a share, or (2) all bonds at a 12% interest rate. The tax rate is 28%. i. Find the EBIT indifference level associated with two financing proposals. ii. Prove that the EPS will be the same regardless of the plan chosen at the EBIT level found in part (I) above. iii. If the projected level of EBIT is RM 20 million, which alternative will yield a higher EPS?
The Blue Boat Company currently has 2 million shares of common stock outstanding, along with RM 5 million in 10% bonds. The firm is considering a RM 10 million expansion program which will be financed with either: (1) all common stock at RM 50 a share, or (2) all bonds at a 12% interest rate. The tax rate is 28%. i. Find the EBIT indifference level associated with two financing proposals. ii. Prove that the EPS will be the same regardless of the plan chosen at the EBIT level found in part (I) above. iii. If the projected level of EBIT is RM 20 million, which alternative will yield a higher EPS?
Essentials Of Investments
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
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The Blue Boat Company currently has 2 million shares of common stock outstanding, along with RM 5 million in 10% bonds. The firm is considering a RM 10 million expansion program which will be financed with either:
(1) all common stock at RM 50 a share, or
(2) all bonds at a 12% interest rate.
The tax rate is 28%.
i. Find the EBIT indifference level associated with two financing proposals.
ii. Prove that the EPS will be the same regardless of the plan chosen at the EBIT level found in part (I) above.
iii. If the projected level of EBIT is RM 20 million, which alternative will yield a higher EPS?
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