You work for the CEO of a new company that plans to manufacture and sell a new type of laptop computer. The issue now is how to finance the company, with only equity or with a mix of debt and equity. Expected operating income is$800,000. Other data for the firm are shown below. How much higher or lower will the firm's expected EPS be if it uses some debt rather than only equity, i.e., what is EPSL - EPSU?Oper. income (EBIT)Required investment% Debt$ of Debt$ of Common equityShares issued, $10/shareInterest rateTax ratea. $2.85O b. $0.75O c. $4.05O d. $3.30O e. $2.480% Debt, U$800,000$2,500,0000.0%$0.00$2,500,000250,000ΝΑ25%60% Debt, L$800,000$2,500,00060.0%$1,500,000$1,000,000100,00010.00%25% Assume that you have been hired as a consultant by CGT, a major producer of chemicals and plastics, including plastic grocery bags, styrofoam cups, and fertilizers, to estimate the firm's weighted average cost of capital. The balance sheet andsome other information are provided below.AssetsCurrent assetsNet plant, property, and equipmentTotal assetsLiabilities and EquityAccounts payableAccrualsCurrent liabilitiesLong-term debt (40,000 bonds, $1,000 par value)Total liabilitiesCommon stock (10,000,000 shares)Retained earningsTotal shareholders' equityTotal liabilities and shareholders' equityb. 15.88%The stock is currently selling for $23.35 per share, and its noncallable $1,000.00 par value, 25-year, 12.00% bonds with semiannual payments are selling for $912.28. The beta is 1.08, the yield on a 6-month Treasury bill is 4.00%, and the yieldon a 25-year Treasury bond is 6.00%. The required return on the stock market is 12.00%, but the market has had an average annual return of 15.00% during the past 5 years. The firm's tax rate is 25%. Based on the CAPM, what is the firm's costof equity?a. 9.36%c. 12.48%$38,000,000$101,000,000$139,000,000d. 15.72%e. 12.64%$10,000,000$9,000,000$19,000,000$40,000,000$59,000,000$30,000,000$50,000,000$80,000,000$139,000,000Screenshot

“Since you have asked multiple question, we will solve the first question for you. If you want any specific question to be solved then please specify the question number or post only that question.”Earnings per share:Earnings per share is calculated by dividing the company’s net income minus preferred dividends by the average number of outstanding shares. EPS is a key indicator of a company’s profitability and is often used by investors to evaluate a company’s performance and potential for growth. A higher EPS indicates that a company is generating more profit per share, which can be attractive to investors. Conversely, a lower EPS may raise concerns about the company’s financial health and future prospects. Companies often report both basic EPS, which uses the actual number of outstanding shares, and diluted EPS, which takes into account potential dilution from options, warrants, and convertible securities.Calculation of earnings per share in Excel:Result:Hence, the difference in EPS L - EPS U is $2.48. Therefore, option e is correct.

Answered: You work for the CEO of a new company…

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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