Suppose the project will require 300,000 in assets. THe project is expected to p
ID: 2627895 • Letter: S
Question
Suppose the project will require 300,000 in assets.
THe project is expected to produce an EBITof $50,000
the project will be financed with 100% equity
Common equity outstanding will be 10,000 shares
The company faces a tax rae of 40%
1. EPS will be ----------------- if it finances theis project with 100% equity.
2. What will the ROE be on this project if the company decides to finance this project with 50% debt and 50% equity? THe interest rate of the company's debt is 11%. Because they are only going to finance 50% of the project with equity, it will have only 5000 shares outstanding.
3. The EPS will be-------------------if it finances this project with 50% equity and 50% debt.
Explanation / Answer
1)100% Equity
EBIT = 50000
Less:-Interest = Nil
PBT = 50000
Less:-Tax (40% of 50000) = (20000)
PAT = 30000
..
No of Equity shares outstanding = 10000
..
EPS = PAT/ No of Equity shares outstanding
= 30000/10000
= $3 per share.
..
EPS will be -----$3------------ if it finances theis project with 100% equity.
2)50% DEBT & 50% EQUITY
Equity = 300000*50% = $150000
Debt = 300000*50% = $150000
..
Income Statement:-
EBIT = 50000
Less:- Interest (150000*11%) = (16500)
PBT = 33500
Less:-Tax (33500*40%) = (13400)
PAT = 20100
..
ROE = PAT/EQUITY * 100
= 20100/150000 * 100
= 13.4%
3)EPS = PAT / No of Equity shares outstanding
= 20100/5000
= $4.02 per share
..
The EPS will be-------$4.02------------if it finances this project with 50% equity and 50% debt.
1)100% Equity
EBIT = 50000
Less:-Interest = Nil
PBT = 50000
Less:-Tax (40% of 50000) = (20000)
PAT = 30000
..
No of Equity shares outstanding = 10000
..
EPS = PAT/ No of Equity shares outstanding
= 30000/10000
= $3 per share.
..
EPS will be -----$3------------ if it finances theis project with 100% equity.
2)50% DEBT & 50% EQUITY
Equity = 300000*50% = $150000
Debt = 300000*50% = $150000
..
Income Statement:-
EBIT = 50000
Less:- Interest (150000*11%) = (16500)
PBT = 33500
Less:-Tax (33500*40%) = (13400)
PAT = 20100
..
ROE = PAT/EQUITY * 100
= 20100/150000 * 100
= 13.4%
3)EPS = PAT / No of Equity shares outstanding
= 20100/5000
= $4.02 per share
..
The EPS will be-------$4.02------------if it finances this project with 50% equity and 50% debt.
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.