A company is planning to invest $12,000,000 in an expansion program, which is ex
ID: 2470841 • Letter: A
Question
A company is planning to invest $12,000,000 in an expansion program, which is expected to increase income before interest and taxes by $2,200,000. The company is currently earning $2.80 per share on 1,000,000 shares of common stock outstanding. The capital structure prior to the investment is provided below. REQUIRED: Assuming that the firm maintains its current income and achieves the anticipated income from the expansion, what will be the earnings per share under the following circumstances? The expansion is financed by debt. The expansion is financed by equity. At what level of income before interest and taxes will the earnings per share be the same amount under either alternative?Explanation / Answer
At below EBIT levls the EPS would be same:
Financed thorugh debt Financed through equity Sales 100,000,000 Variable costs (65,000,000) Fixed costs (29,000,000) Income before interest and tax 6,000,000 8,200,000 8,200,000 Interest expense (2,000,000) 2,960,000 (2,000,000) Income before taxes 4,000,000 5,240,000 6,200,000 taxes @ 30% 1,200,000 1,572,000 1,860,000 Net income 2,800,000 3,668,000 4,340,000 EPS 3.67 3.34Related Questions
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