Family Dollar Stores [FDO], a firm operating discount retail stores, has no long-term debt in its capital
Question:
Family Dollar Stores [FDO], a firm operating discount retail stores, has no long-term debt in its capital structure, even though the use of financial leverage in the form of long-term debt might increase the firm’s earnings per share. Answer the following questions about Family Dollar:
a. What was the EBIT—that is, operating income—of Family Dollar for the past three years?
b. Calculate the firm’s net income and earnings per share for the past three years.
c. What was the average earnings per share during the past three years?
d. If the firm borrows $740 million in long-term debt at 10 percent to help finance its operations during the first year, what would be the earnings per share in each year?
e. Should Family Dollar start using long-term debt? Explain your answer.
f. Based on your findings, make an argument for and against using long-term debt in a firm’s capital structure.
Step by Step Answer:
Essentials of Managerial Finance
ISBN: 978-0324422702
14th edition
Authors: Scott Besley, Eugene F. Brigham