Question: a. In the following example, the proposed debt issue would raise $4,000,000; the interest rate would be 10%. In addition, the EBIT would be $2,000,000.
a. In the following example, the proposed debt issue would raise $4,000,000; the interest rate would be 10%. In addition, the EBIT would be $2,000,000. What would be the increase in the Earnings Per Share (EPS) from to current to the proposed structure?
| Current | Proposed | ||||
| Assets | $ | 10,000,000 | $ | 10,000,000 | |
| Debt | $ | 0 | $ | 4,000,000 | |
| Equity | $ | 10,000,000 | $ | 6,000,000 | |
| Debt-Equity Ratio | 0 | 0.67 | |||
| Share Price | $ | 25 | $ | 25 | |
| Shares Outstanding | 400,000 | 240,000 | |||
| Interest Rate | N/A | 10 | % | ||
b. In the following example, the proposed debt issue would raise $4,000,000; the interest rate would be 10%. In addition, the EBIT would be $2,000,000. What would be the increase in the Return on Equity (ROE) from to current to the proposed structure?
| Current | Proposed | ||||
| Assets | $ | 10,000,000 | $ | 10,000,000 | |
| Debt | $ | 0 | $ | 4,000,000 | |
| Equity | $ | 10,000,000 | $ | 6,000,000 | |
| Debt-Equity Ratio | 0 | 0.67 | |||
| Share Price | $ | 25 | $ | 25 | |
| Shares Outstanding | 400,000 | 240,000 | |||
| Interest Rate | N/A | 10 | % | ||
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