Earnings per share (EPS): It refers to the share of earnings earned by the shareholder on each owned. The formula to calculate the earnings per share is as follows: Earnings per share } = Net income – Preferred dividends Weighted average number of shares outstanding To Prepare: a table indicating the expected earnings per share on the common stock under each plan.

Question

An enterprise owner is considering three options to raise funds for his business activities, each with a different source of capital: • option I-business activities financed exclusively with equity of $600,000, • option II equity amounts to $450,000, the remaining $150,000 is borrowed from a bank at the annual rate of 7.6%, option III equity amounts to $350,000, the remaining $250,000 is borrowed from a bank at the annual rate of 10.4%. The annual net sales revenue is expected to reach $760,000 with total operating costs being $687,000. The enterprise pays 19% income tax. Based on the information provided, determine: return on equity depending on the adopted financing option and its increase (AROE) possible to obtain due to using the debt, ● the degree of financial leverage for each financing option, .threshold EBIT and the threshold return on equity needed for financial leverage to work.

Answer 1

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Chapter 14, Problem 14.6CP

1.

To determine

Earnings per share (EPS): It refers to the share of earnings earned by the shareholder on each owned. The formula to calculate the earnings per share is as follows:

Earnings per share} = Net income – Preferred dividendsWeighted average number of shares outstanding

To Prepare: a table indicating the expected earnings per share on the common stock under each plan.

2(a)

To determine

To discuss: the factors that should be considered in evaluating the two plans.

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An enterprise owner is considering three options to raise funds for his business activities, each with a different source of capital: • option I-business activities financed exclusively with equity of $600,000, • option II equity amounts to $450,000, the remaining $150,000 is borrowed from a bank at the annual rate of 7.6%, option III equity amounts to $350,000, the remaining $250,000 is borrowed from a bank at the annual rate of 10.4%. The annual net sales revenue is expected to reach $760,000 with total operating costs being $687,000. The enterprise pays 19% income tax. Based on the information provided, determine: return on equity depending on the adopted financing option and its increase (AROE) possible to obtain due to using the debt, ● the degree of financial leverage for each financing option, .threshold EBIT and the threshold return on equity needed for financial leverage to work.

A 65.

Question from accounting homework. Picture attached. In first column of chart, here are the options to write: Earning per share after expansion Expected project income before income tax Expected project income before interest and income tax Expected projectnet income Income tax expense Interest expense Net income before expansion Total company net income