EBIT-EPS analysis

6. EBIT-EPS analysis EBIT EPS analysis is used to examine the effect of alternative plans of capital financing on the firm's earnings per share (EPS), assuming a range of values for the firm's level of earnings before interest and taxes (EBIT). The results can be generated and presented using either a mathematical or a graphical solution What information is needed to perform an EBIT-EPS analysis? Check all that apply the composition of future alternative forms of or plans for capital financing The current and expected future market prices of the firm's debe instruments Projections regarding the firm's future EBIT levels The current and expected future prices per share of the firm's preferred stock An important piece of information produced by the EBIT-EPS analyses is the level of EBIT at which two pensible financing plans generate the same EPS, such that a decision maker would be indifferent between the two plans. Consider the case of Ironworks Railroad Company Ironworks Railroad Company is an unlevered firm currently earning an EBIT of $10 million, wah 3 million shares of common stock outstanding and a tax rate of 40%. In anticipation of making a major acquisition, Tronworks is evaluating whether to finance its future growth using either the sale of $20 million of new 10% bonds (Plan 1) or the issuance of 2 milion new shares of common stock at $10 per share (Plan 2). The firm's EBIT-EPS indifference point corresponds to an EBIT of $ and an EPS of $ Earlier today, Ironworks's CFO and her staff developed two postacquisition forecasts of the firm's expected EBIT. If the economy and the acquisition are expected to perform poorly, Ironworks's EBIT is expected to be $3 million, but if the economy and the acquisition are expected to perform well, the EBIT is expected to be $15 million. One of the staff members used this projected EBIT data and the corresponding EPS values to generate the following EBIT-EPS graph. Examine the graph and use it to answer the questions that follow. Tooltip: Mouse over the points on the graph to see their coordinates. 10 25 30 Plan (Debt) 25 EPSED PlantEquity) 15 10 OS EBIT EPS indifference Point 0 24 16 18 20 6 3 10 12 14 EBIT(Millions of dollars) 30 Planet EPSID Pardulys 16 EBET-EPS inatterence Powe 10 12 14 EBITIM Sons of dollars) should be recommended, because Which financing plan should be recommended it fronworks expects an EBIT of $12 million? for the specified level of EBIT