Charline, president of IT Manufacturing Inc., is preparing a proposal to present to her board of...

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Charline, president of IT Manufacturing Inc., is preparing a proposal to present to her board of directors regarding a planned plant expansion that will cost $50 million. At issue is whether the expansion should be financed with debt (a long-term note at First National Bank of ACM with an interest of 15%) or through the issuance of common stock (200,000 shares at $50 per share). IT Manufacturing Inc. currently has a capital structure of: Debt (12% interest) Equity 40,000,000 60,000,000 The fira's most recent income statement is Rtesented next Sales Cost of goods sold Gross Profit Operating expenses Operating profit Interest expense Earnings before tax $100,000,000 65.000,000 35,000,000 20,000.000 15,000,000 4.800.000 10,200,000 Income tax expense (40%) 4.080,000 6,120.000 Net Income Earnings per share (800,000 shares) 7.65 Charline is aware that financing the expansion with debt will increase risk but could also benefit shareholders through financial leverage, Estimates are that the plant expansion will increase operating profit by 20%. The tax rate is expected to stay at 40%. Assume a 100% dividend pavout. a. Calculate the new operating income and net income for the two different options.(4pts) b. Calculate the debt ratio times interest eamed earnings, per share, operatina ceturn on. assets ceturn on eauity. assuming the expected increase in operating profit is realized, for the debt scenario and the equity scenario.(10pts) Charline, president of IT Manufacturing Inc., is preparing a proposal to present to her board of directors regarding a planned plant expansion that will cost $50 million. At issue is whether the expansion should be financed with debt (a long-term note at First National Bank of ACM with an interest of 15%) or through the issuance of common stock (200,000 shares at $50 per share). IT Manufacturing Inc. currently has a capital structure of: Debt (12% interest) Equity 40,000,000 60,000,000 The fira's most recent income statement is Rtesented next Sales Cost of goods sold Gross Profit Operating expenses Operating profit Interest expense Earnings before tax $100,000,000 65.000,000 35,000,000 20,000.000 15,000,000 4.800.000 10,200,000 Income tax expense (40%) 4.080,000 6,120.000 Net Income Earnings per share (800,000 shares) 7.65 Charline is aware that financing the expansion with debt will increase risk but could also benefit shareholders through financial leverage, Estimates are that the plant expansion will increase operating profit by 20%. The tax rate is expected to stay at 40%. Assume a 100% dividend pavout. a. Calculate the new operating income and net income for the two different options.(4pts) b. Calculate the debt ratio times interest eamed earnings, per share, operatina ceturn on. assets ceturn on eauity. assuming the expected increase in operating profit is realized, for the debt scenario and the equity scenario.(10pts)

Answer rating: 100% (QA)

a Operating income Normal Add increase 20 Operating profit Less interest expense 40000000 12 Interes... View the full answer