The Savannah Company has 10,000 shares of common stock outstanding with a par va
ID: 2643890 • Letter: T
Question
The Savannah Company has 10,000 shares of common stock outstanding with a par value of $40, and its tax rate is 48%. The Savannah Company is weighing the choice among three financing alternatives for a major expansion program which would require $100,000 and increase its operating profit from $90,000 to $125,000. The financing alternative to raise the needed $100,000 are as follows:
2,000 common shares at $50 net to the company.
$100,000 of 7% preferred stock.
$100,000 of 6% bonds.
Assuming an EBIT of $125,000 for each alternative, determine the EPS for each financing plan. I need detailed and accurate solution PLEASE.
Explanation / Answer
Note : Interest on Preferred stock is not tax deductible.
Computation of Capital Employed Particulars Shares option Prefered stock Bonds Common stock 400,000 400,000 400,000 Additional Shares 100,000 Prefered stock @ 7% 100,000 Bonds @ 6% 100,000 Total Fund employed 500,000 500,000 500,000 Computation of EPS EBIT 125,000 125,000 125,000 Less: Interest on debt 6,000 EBT 125,000 125,000 119,000 Tax @ 48% 60,000 60,000 57,120 EAT 65,000 65,000 61,880 Numbers of shares 12,000 10,000 10,000 EPS = EAT/No. of shares 5.42 6.50 6.19Related Questions
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