The company requires P1,000,000 for its proposed plan. The following financial alternatives are available: ● Plan I: 100% Equity Capital (Face Value P100) ● Plan II: 50% Equity Capital (Face Value P100) and 50% Debenture (interest rate 6%) ● Plan III: 50% Equity Capital (Face Value P100) and 50% Preference Shares (rate of dividend 6%) ● Plan IV: 25% Equity Capital (Face Value $100), 25% Debentures (interest rate 6%), and 50% Preference Shares (rate of dividend 6%) The rate of tax applicable to the company is 50%. The company expects an EBIT of P4,000,000. Calculate the indifference point of EBIT between Plan I and Plan III. Plan I: There is no fixed financial charge (debenture interest or preference dividend). Therefore, there is no financial break-even. Plan II: Fixed financial charges amount to P30,000 (interest on debentures). Therefore, the financial break-even is P30,000. Plan III: In the case of Plan III, the fixed financial charge is P30,000 (preference dividend). Preference dividend is payable out of profit after tax. The tax rate applicable is 50%. Therefore, the financial break-even is P60,000 (Dividend 30,000 + Tax 30,000). Plan IV: In the case of Plan IV, the fixed financial charges are P75,000, i.e., interest on debentures P15,000 + preference dividend (P30,000 + Tax on profit P30,000) P60,000.
The company requires P1,000,000 for its proposed plan. The following financial alternatives are available: ● Plan I: 100% Equity Capital (Face Value P100) ● Plan II: 50% Equity Capital (Face Value P100) and 50% Debenture (interest rate 6%) ● Plan III: 50% Equity Capital (Face Value P100) and 50% Preference Shares (rate of dividend 6%) ● Plan IV: 25% Equity Capital (Face Value $100), 25% Debentures (interest rate 6%), and 50% Preference Shares (rate of dividend 6%) The rate of tax applicable to the company is 50%. The company expects an EBIT of P4,000,000. Calculate the indifference point of EBIT between Plan I and Plan III. Plan I: There is no fixed financial charge (debenture interest or preference dividend). Therefore, there is no financial break-even. Plan II: Fixed financial charges amount to P30,000 (interest on debentures). Therefore, the financial break-even is P30,000. Plan III: In the case of Plan III, the fixed financial charge is P30,000 (preference dividend). Preference dividend is payable out of profit after tax. The tax rate applicable is 50%. Therefore, the financial break-even is P60,000 (Dividend 30,000 + Tax 30,000). Plan IV: In the case of Plan IV, the fixed financial charges are P75,000, i.e., interest on debentures P15,000 + preference dividend (P30,000 + Tax on profit P30,000) P60,000.
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 company requires P1,000,000 for its proposed plan. The following financial alternatives are available:
● Plan I: 100% Equity Capital (Face Value P100)
● Plan II: 50% Equity Capital (Face Value P100) and 50% Debenture (interest rate 6%)
● Plan III: 50% Equity Capital (Face Value P100) and 50%Preference Shares (rate of dividend 6%)
● Plan IV: 25% Equity Capital (Face Value $100), 25% Debentures (interest rate 6%), and 50% Preference Shares (rate of dividend 6%)
The rate of tax applicable to the company is 50%. The company expects an EBIT of P4,000,000. Calculate the indifference point of EBIT between Plan I and Plan III.
Plan I: There is no fixed financial charge (debenture interest or preference dividend). Therefore, there is no financial break-even.
Plan II: Fixed financial charges amount to P30,000 (interest on debentures). Therefore, the financial break-even is P30,000.
Plan III: In the case of Plan III, the fixed financial charge is P30,000 (preference dividend). Preference dividend is payable out of profit after tax. The tax rate applicable is 50%. Therefore, the financial break-even is P60,000 (Dividend 30,000 + Tax 30,000).
Plan IV: In the case of Plan IV, the fixed financial charges are P75,000, i.e., interest on debentures P15,000 + preference dividend (P30,000 + Tax on profit P30,000) P60,000.
● Plan I: 100% Equity Capital (Face Value P100)
● Plan II: 50% Equity Capital (Face Value P100) and 50% Debenture (interest rate 6%)
● Plan III: 50% Equity Capital (Face Value P100) and 50%
● Plan IV: 25% Equity Capital (Face Value $100), 25% Debentures (interest rate 6%), and 50% Preference Shares (rate of dividend 6%)
The rate of tax applicable to the company is 50%. The company expects an EBIT of P4,000,000. Calculate the indifference point of EBIT between Plan I and Plan III.
Plan I: There is no fixed financial charge (debenture interest or preference dividend). Therefore, there is no financial break-even.
Plan II: Fixed financial charges amount to P30,000 (interest on debentures). Therefore, the financial break-even is P30,000.
Plan III: In the case of Plan III, the fixed financial charge is P30,000 (preference dividend). Preference dividend is payable out of profit after tax. The tax rate applicable is 50%. Therefore, the financial break-even is P60,000 (Dividend 30,000 + Tax 30,000).
Plan IV: In the case of Plan IV, the fixed financial charges are P75,000, i.e., interest on debentures P15,000 + preference dividend (P30,000 + Tax on profit P30,000) P60,000.
CHOICES:
P60,000
P100,000
P 90,000
P 120,000
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