Lakehead Capital is looking to raise $5.5 million for a new venture. Lakehead Capital can borrow money
Question:
Lakehead Capital is looking to raise $5.5 million for a new venture. Lakehead Capital can borrow money from a bank at a 6.8% interest each year or raise money by issuing equity to the market. After consulting an underwriter, Lakehead Capital could issue one million common shares at $5.5 per share. Let us assume that there are no underwriting fees. Below is the income statement forecasted for Lakehead Capital.
Income Statement
Dec-31-2022
($000s)
Earnings before Interest & Taxes (EBIT)
5,798
Interest
762
Earnings before Taxes (EBT)
5,036
Taxes @ 35%
1762.6
Net Income
3,273
The company currently has 5 million common shares.
a) What would be the companys earnings per share if the company took the bank loan or issue common shares?
b) Determine the break-even EBIT between the two financing options. If the actual EBIT is $3,750,000 would Lakehead Capital be better off increasing their level of debt?
Income Tax Fundamentals 2013
ISBN: 9781285586618
31st Edition
Authors: Gerald E. Whittenburg, Martha Altus Buller, Steven L Gill