Lopez Company has 10.8 million in assests 60% financed by debt and 40% financed

Question

Lopez Company has 10.8 million in assests 60% financed by debt and 40% financed by common stock intrest rate on debt is 7% and the par value is $10per share.They are considering two financing plan for a extension of 19 million in assests.

Under Plan A the debt to total assets will be maintained but the new debt will be 10%

Under Plan B only new common stock will be issued at $10 per share

Tax rate is 35%

a= if  EBIT is 8% on total assets what is the EPS before expansion and the two alternatives as well.

b= what is the degree of financial leverage under each plan including before expansion

c= If stock could be sold at $20 a share due to increased expectations of the firms sales and earnings.What impact would this have on the EPS for the two alternatives?

Round all answers to 2 decimal places

Explanation / Answer

Hi,

Please find the answer as follows;

Part A:

Part B:

Degree of Financial Leverage = EBIT/EBIT - Interest

Part C:

It is evident from the above mentioned figure that Plan B woul continue to provide higher EPS.

Thanks.

Current Plan A Plan B EBIT 864000 1520000 1520000 Less Interest 453600 945600 453600 EBT 410400 574400 1066400 Less Taxes 143640 201040 373240 EAT 266760 373360 693160 Common Shares 432000 760000 1252000 EPS 0.62 0.49 0.55

Related Questions

Navigate

• Browse (All)
• Browse L
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.