I need help with finding the interest in this problem? The Lopez-Portillo Compan

Question

I need help with finding the interest in this problem?

The Lopez-Portillo Company has $10.6 million in assets, 80 percent financed by debt, and 20 percent financed by common stock. The interest rate on the debt is 9 percent and the par value of the stock is $10 per share. President Lopez-Portillo is considering two financing plans for an expansion to $18 million in assets.

Under Plan A, the debt-to-total-assets ratio will be maintained, but new debt will cost a whopping 12 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 9% on total assets, compute earnings per share before the expansion and under the two alternatives.

a.) Calcuation of EPS (Earnings Per Share) EBIT is 9% of total assets Current year plan, Total assets are 10.6 million Plan A and B, Total assets are 18 million Earnings Per Share (EPS) Current Plan A Plan B EBIT            954,000             1,620,000 1,620,000 Less Interest EBT Less Taxes (40%) EAT Common Shares EPS (EAT/Common Shares

Explanation / Answer

Earnings Per Share (EPS) Current Plan A Plan B EBIT 954,000 1,620,000 1,620,000 Less Interest 190800 368400                -   EBT 763200 1251600 1620000 Less Taxes (40%) 305280 500640 648000 EAT 457920 750960 972000 Common Shares 848000 1440000 1588000 EPS (EAT/Common Shares                      0.54           0.52           0.61

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