Emco Products has a present capital structure consisting only of common stock (10 million shares). The company
Question:
Emco Products has a present capital structure consisting only of common stock (10 million shares). The company is planning a major expansion. At this time, the company is undecided between the following two financing plans (assume a 40 percent marginal tax rate):
■ Plan 1: Equity financing. Under this plan, an additional 5 million shares of common stock will be sold at $10 each.
■ Plan 2: Debt financing. Under this plan, $50 million of 10 percent long-term debt will be sold. One piece of information the company desires for its decision analysis is an EBIT-EPS analysis.
a. Calculate the EBIT-EPS indifference point.
b. Graphically determine the EBIT-EPS indifference point. Use EBIT = $10 million and $25 million.
c. What happens to the indifference point if the interest rate on debt increases and the common stock sales price remains constant?
d. What happens to the indifference point if the interest rate on debt remains constant and the common stock sales price increases?
Common stock is an equity component that represents the worth of stock owned by the shareholders of the company. The common stock represents the par value of the shares outstanding at a balance sheet date. Public companies can trade their stocks on... Capital Structure
Capital structure refers to a company’s outstanding debt and equity. The capital structure is the particular combination of debt and equity used by a finance its overall operations and growth. Capital structure maximizes the market value of a...
Step by Step Answer:
a b Equity Financing Debt Financing Indifference point 15 million c Indifference point mo...View the full answer
Contemporary Financial Management
ISBN: 9780324289114
10th Edition
Authors: James R Mcguigan, R Charles Moyer, William J Kretlow
