The Lopez-Portillo Company has $12.1 million in assets, 90 percent financed by debt and 10 percent financed by common stock. The interest rate on the debt is 11 percent and the par value of the stock is $10 per share. President Lopez-Portillo is considering two financing plans for an expansion to $25.5 million in assets. Under Plan A, the debt-to-total-assets ratio will be maintained, but new debt will cost a whopping 13 percent! Under Plan B, only new common stock at $10 per share will be issued. The tax rate is 40 percent. a. If EBIT is 12 percent on total assets, compute earnings per share (EPS) before the expansion and under the two alternatives. Note: Round your answers to 2 decimal places. Current Plan A Plan B Earnings per Share b. What is the degree of financial leverage under each of the three plans? Note: Round your answers to 2 decimal places. Current Plan A Plan B Degree of Financial Leverage c. If stock could be sold at $20 per share due to increased expectations for the firm's sales and earnings, compute earnings per share for each alternative. Note: Round your answers to 2 decimal places. Earnings per Share Plan A Plan B
The Lopez-Portillo Company has $12.1 million in assets, 90 percent financed by debt and 10 percent financed by common stock. The interest rate on the debt is 11 percent and the par value of the stock is $10 per share. President Lopez-Portillo is considering two financing plans for an expansion to $25.5 million in assets. Under Plan A, the debt-to-total-assets ratio will be maintained, but new debt will cost a whopping 13 percent! Under Plan B, only new common stock at $10 per share will be issued. The tax rate is 40 percent. a. If EBIT is 12 percent on total assets, compute earnings per share (EPS) before the expansion and under the two alternatives. Note: Round your answers to 2 decimal places. Current Plan A Plan B Earnings per Share b. What is the degree of financial leverage under each of the three plans? Note: Round your answers to 2 decimal places. Current Plan A Plan B Degree of Financial Leverage c. If stock could be sold at $20 per share due to increased expectations for the firm's sales and earnings, compute earnings per share for each alternative. Note: Round your answers to 2 decimal places. Earnings per Share Plan A Plan B
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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Question
am. 115.
Transcribed Image Text:The Lopez-Portillo Company has $12.1 million in assets, 90 percent financed by debt and 10 percent financed by common stock. The
interest rate on the debt is 11 percent and the par value of the stock is $10 per share. President Lopez-Portillo is considering two
financing plans for an expansion to $25.5 million in assets.
Under Plan A, the debt-to-total-assets ratio will be maintained, but new debt will cost a whopping 13 percent! Under Plan B, only new
common stock at $10 per share will be issued. The tax rate is 40 percent.
a. If EBIT is 12 percent on total assets, compute earnings per share (EPS) before the expansion and under the two alternatives.
Note: Round your answers to 2 decimal places.
Current
Plan A
Plan B
Earnings per
Share
b. What is the degree of financial leverage under each of the three plans?
Note: Round your answers to 2 decimal places.
Current
Plan A
Plan B
Degree of Financial
Leverage
c. If stock could be sold at $20 per share due to increased expectations for the firm's sales and earnings, compute earnings per share
for each alternative.
Note: Round your answers to 2 decimal places.
Earnings per
Share
Plan A
Plan B
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