Lakehead Capital is looking to raise $5.5 million for a new venture. Lakehead Capital can borrow money

Fantastic news! We've Found the answer you've been seeking!

Question:

Lakehead Capital is looking to raise $5.5 million for a new venture. Lakehead Capital can borrow money from a bank at a 6.8% interest each year or raise money by issuing equity to the market. After consulting an underwriter, Lakehead Capital could issue one million common shares at $5.5 per share. Let us assume that there are no underwriting fees. Below is the income statement forecasted for Lakehead Capital.

Income Statement

Dec-31-2022

($000s)

Earnings before Interest & Taxes (EBIT)

5,798

Interest

762

Earnings before Taxes (EBT)

5,036

Taxes @ 35%

1762.6

Net Income

3,273

The company currently has 5 million common shares.

a) What would be the companys earnings per share if the company took the bank loan or issue common shares?

b) Determine the break-even EBIT between the two financing options. If the actual EBIT is $3,750,000 would Lakehead Capital be better off increasing their level of debt?