Mwinlanaa company currently has 3 million in debt outstanding, bearing an interest rate of 12 percent. it
Question:
Mwinlanaa company currently has ¢3 million in debt outstanding, bearing an interest rate of 12 percent. it wishes to finance a ¢4 million expansion program and is considering three alternatives: additional debt at 14 percent interest (option 1), preferred stock with a 12percent dividend (option 2), and the sales of common stock at ¢16 per share (option 3). the company currently has 800,000 shares of common stock outstanding and is in a 40 percent tax bracket.
a) if earning before interest and taxes are currently ¢1.5 million, what would be earnings per share for the three alternatives, assuming no immediate increase in operating profit.
b) determine the indifference point between the debt plan and the common stock plan and interpret the result.
c) compute the degree of financial leverage (DFL) for each alternative at the expected EBIT level of ¢1.5 millio
Introduction to Finance Markets Investments and Financial Management
ISBN: 978-1118492673
15th edition
Authors: Melicher Ronald, Norton Edgar