Namib Mills, has a fixed total capital of $10,000,000, which is made up of 20 percent debt and 80 percent equity. The firm has 100,000 outstanding ordinary shares and no preference shares. Although Theo feels that the firm's current policy of paying out 60 percent of each year's earnings in dividends is appropriate, he believes that the 3 current capital structure may lack adequate financial leverage. In order to evaluate the firm's capital structure, Theo is considering three alternative capital structures - A (30 percent debt), B (50 percent debt), and C (60 percent debt). The interest rate on current debt is 10 percent and is believed to remain the same up to a borrowing limit of $1,000,000. Theo expects the firm's current earnings before interest and taxes (EBIT) to remain at $1,200,000. The firm expects to have $200,000 of retained earnings available in the coming year. The firm has a tax rate of 40 percent.

Calculate the following items for each alternative, assuming that there are no taxes on corporate income:

(i) Assuming that the share price stays the same, calculate the earnings per share for the current and proposed three financing alternatives.

Answer rating: 100% (QA)

30 debt ratlo Debt D 30 x capital 30 x 10000000 3000000 Interest ... View the full answer