E-Link Company requires P1.5M for the installation of a new unit, which will yield annual earnings...
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E-Link Company requires P1.5M for the installation of a new unit, which will yield annual earnings before interest and taxes (EBIT) of P250,000. The company's objective is to maximize earnings per share (EPS). It is considering the possibility of issuing equity shares plus raising a debt of P300,000 or P600,000 or P900,000. The current market price per share is P50 which is expected to drop to P40 per share if the market borrowings were to exceed P700,000. The costs of borrowing are indicated as follows: Level of Borrowing: Up to P200,000, above P200,000 to P600,000, above P600,000 to P900,000 Costs of Borrowing: 12% p.a.,15% p.a.,17% p.a., respectively. Assuming a tax rate of 50%, work out the EPS and the proposals. Support your answers with neatly labeled calculations. 1. Determine the capital required for each component source under the options. 2. Determine the number of equity shares to be issued under the options. 3. Determine the total interest under the options. 4. Determine the EPS for each option. 5. If the company's objective is to maximize EPS, which would you recommend? 6. What is the effect of financial leverage on the company's EPS? What is financial leverage? 7. What conclusion can you derive at based on your answer? E-Link Company requires P1.5M for the installation of a new unit, which will yield annual earnings before interest and taxes (EBIT) of P250,000. The company's objective is to maximize earnings per share (EPS). It is considering the possibility of issuing equity shares plus raising a debt of P300,000 or P600,000 or P900,000. The current market price per share is P50 which is expected to drop to P40 per share if the market borrowings were to exceed P700,000. The costs of borrowing are indicated as follows: Level of Borrowing: Up to P200,000, above P200,000 to P600,000, above P600,000 to P900,000 Costs of Borrowing: 12% p.a.,15% p.a.,17% p.a., respectively. Assuming a tax rate of 50%, work out the EPS and the proposals. Support your answers with neatly labeled calculations. 1. Determine the capital required for each component source under the options. 2. Determine the number of equity shares to be issued under the options. 3. Determine the total interest under the options. 4. Determine the EPS for each option. 5. If the company's objective is to maximize EPS, which would you recommend? 6. What is the effect of financial leverage on the company's EPS? What is financial leverage? 7. What conclusion can you derive at based on your answer?
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Answer rating: 100% (QA)
To solve the given problem lets calculate the capital required number of equity shares total interest EPS and make a recommendation based on the objective of maximizing EPS 1 Capital Required for Each ... View the full answer
Related Book For
Equity Asset Valuation
ISBN: 978-0470571439
2nd Edition
Authors: Jerald E. Pinto, Elaine Henry, Thomas R. Robinson, John D. Stowe, Abby Cohen
Posted Date:
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