Question

TOPP Company is planning to invest $20,000,000 in an expansion program expected to increase income before interest and taxes by $4,000,000. TOPP currently is earning $5 per share on 2,000,000 shares of common stock outstanding. TOPP’s capital structure prior to the investment is as follows:
Total debt. . . . . . . . . . . . . . . . . . . . . . . . $20,000,000
Shareholders’ equity. . . . . . . . . . . . . . . . 50,000,000
Total capitalization. . . . . . . . . . . . . . . . . $70,000,000
Expansion can be financed by the sale of 400,000 shares at $50 each or by issuing long-term debt at 6%. TOPP’s most recent income statement follows:


Required:
a. Assuming TOPP maintains its current income level and achieves the expected income from expansion, what will be TOPP’s earnings per share?
(1) If expansion is financed by debt?
(2) If expansion is financed by equity?
b. At what level of income before interest and taxes will earnings per share be equal under bothalternatives?


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  • CreatedJanuary 22, 2015
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