Calculating Ebt-Eps Analysis
1. Equipment purchase
Firm’s capital structure
Debt $3,500,000
Preferred stock $2,400,000
Common stock $6,300,000
Company will sell 10-year bond at 6.5% per year at a market price of $1,028
Preferred stock paying $2.02 dividend can be sold for $25.07
Common stock is selling at $54.44 per share and the firm pay dividend of $2.97 last year.
Dividend is expected to continue growing at a rate of 5.3% per year into the indefinite future.
If the firm’s tax rate is 30% what discount rate should be used to evaluate equipment price?
After tax cost of debt -= 6.117% x (1- 30%) = (three decimal places)
Cost of common equity = $ $2.97 x(1+5.3%)/$55.44 + 5.3% =
Prefered stock holder’s rate of return
$2.02/ $25.07 = (three decimal places)
Weights After tax cost of financing product
Debt
Preferred Stock
Common stock
WACC =
2. EBIT-EPS analysis for two plans proposed
Plan 1. An all-common equity structure in which $2.4 million will be raised selling $90,000 shares of common stock.
Plan 2 involve issuing $1.3 million in long-term bonds with effect interest rate of 11.9% plus $1.1 million will be raised selling $45,000 shares of common stock. The debt funds have no fixed maturity rate in that this amount of financial leverage is considered a permanent part of the firm’s capital structure.
The firm’s tax rate is 35%
A) find the EBIT indifference associated with both plans
B) Prepare a Pro forma income statement for EBIT level solved in plan 1 that shows EPS will be the same regardless of which plan will be chosen
!. EBIT indifference
EBIT stock plan EBIT bond plan
(EBIT - $0)x (1-36%)/$90,000 = (EBIT- $ Interest expense ) x (1- 36%)/ $45,000
EBIIT
Firm’s capital structure
Debt $3,500,000
Preferred stock $2,400,000
Common stock $6,300,000
Company will sell 10-year bond at 6.5% per year at a market price of $1,028
Preferred stock paying $2.02 dividend can be sold for $25.07
Common stock is selling at $54.44 per share and the firm pay dividend of $2.97 last year.
Dividend is expected to continue growing at a rate of 5.3% per year into the indefinite future.
If the firm’s tax rate is 30% what discount rate should be used to evaluate equipment price?
After tax cost of debt -= 6.117% x (1- 30%) = (three decimal places)
Cost of common equity = $ $2.97 x(1+5.3%)/$55.44 + 5.3% =
Prefered stock holder’s rate of return
$2.02/ $25.07 = (three decimal places)
Weights After tax cost of financing product
Debt
Preferred Stock
Common stock
WACC =
2. EBIT-EPS analysis for two plans proposed
Plan 1. An all-common equity structure in which $2.4 million will be raised selling $90,000 shares of common stock.
Plan 2 involve issuing $1.3 million in long-term bonds with effect interest rate of 11.9% plus $1.1 million will be raised selling $45,000 shares of common stock. The debt funds have no fixed maturity rate in that this amount of financial leverage is considered a permanent part of the firm’s capital structure.
The firm’s tax rate is 35%
A) find the EBIT indifference associated with both plans
B) Prepare a Pro forma income statement for EBIT level solved in plan 1 that shows EPS will be the same regardless of which plan will be chosen
!. EBIT indifference
EBIT stock plan EBIT bond plan
(EBIT - $0)x (1-36%)/$90,000 = (EBIT- $ Interest expense ) x (1- 36%)/ $45,000
EBIIT