Frankline Coin Company is considefined theg two capital structures. The key info
ID: 2765600 • Letter: F
Question
Frankline Coin Company is considefined theg two capital structures. The key information follows. Assume a 40% tax rate. Calculate the financial breakeven point for each plan and the indifference point for the two plans. Calculate the DFL for each plan at the expected EBIT of $50,000. Use this number to explain what change would be expected from a 20% increase (decrease) in EB11 Indicate over what EBIT range, if any, each structure is preferred. If EBIT is $35,000, what arc EPS under each plan? What if EBIT is $60.000?Explanation / Answer
Sol 1:
Formula of financial breakeven point= annual interest charges+pref div
(1-tax)
Financial breakeven point for plan A= 40000+20000/(1-.4)
= 100000
Financial breakeven point for plan B= 24500+10000/(1-.4)
=57500
Indifference point =
(EBIT indiff point of A-int cost)(1-tax)-pref div = (EBIT indiff point OF B-int cost)(1-tax)-pref div
Outstanding shares of A outstanding shares of B
(X- 40000)(1-.4)-20000 = (X-24500)(1-.6)-10000
10000 20000
X= 105500
SOL 2.
DFL= EBIT
EBIT- INT
A B
50000 50000
50000-40000 50000-24500
5 1.96
IF EBIT increase by 20%, new EBIT would be 50000+ 20%= 60000
60000 60000
60000-40000 60000-24500
3 1.69
Sol 3
Already explain in previous part. Bear in mind Fundamental analysis uses the DLF to determine the sensitivity of a company's earnings per share (EPS) in relation to a change in its earnings before interest and taxes (EBIT).
SOL 4
If EBIT is 35000
A B
EPS= earning for equity share holder earning for equity share holder
Common stock Common stock
No EPS, since int is exceed than EBIT. ( 35000-24500-10000)
20000
=.025
If EBIT is 60000
A B
EPS= earning for equity share holder earning for equity share holder
Common stock Common stock
(60000-40000-20000) ( 60000-24500-10000)
10000 20000
0 =1.275
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