Calculate the earnings per share

Assignment Help Financial Management

Reference no: EM131495431

Currently, ABC Company does not have any borrowings. Management forecast that revenue for FY 2016 will increase to $13.5 million, while gross profit margin remains constant. Operating expenses will increase by 3% and corporate tax rate remains at 17%.

Sharon met up with the firm’s bankers recently and understand that they are willing to extend a term loan of $10 million to Nakami and the borrowing rate is 8%. The proceeds from this loan will be used for share repurchase.

She wants to evaluate the firm’s optimal capital structure. Currently, there are 6 million ordinary share outstanding and each share is valued at $5.00.

(a) Calculate the earnings per share for FY 2016 under the following scenarios:

(i) Without any borrowings

(ii) If the firm borrows $5 million

(iii) If the firm borrows $10 million

Advise Sharon which capital structure the firm should adopt and why.

(b) Discuss whether the company can issue bonds to repurchase the shares advisable and whether use of earnings per share as the criterion is appropriate in capital structure decision.

(c) Generally, companies with high operating leverage will tend to have a high financial leverage. Critically analyse this statement.

Reference no: EM131495431

Questions Cloud

Miscellaneous and administrative expenses : A sector fund specializing in commercial bank stocks had average daily assets of $3.4 billion during the year.

What nominal interest rate is being charged on loan : Assume monthly compounding of interest. What nominal interest rate is being charged on this? loan?

World income appreciation fund has current assets : The World Income Appreciation Fund has current assets with a market value of $8.5 billion,

Explain how the investor could separate the alpha : Explain how the investor could separate the alpha and the beta and gain the desired systematic exposure to large cap US names.

Calculate the earnings per share : Currently, ABC Company does not have any borrowings. Calculate the earnings per share for FY 2016 under the following scenarios:

Allocated in nursing departments operating budget : How many of the following expenses are likely to be allocated in a nursing department’s operating budget?

Within a managers departmental operating budget : Within a manager’s departmental operating budget, which of the following will probably not be included?

Create cost awareness : One objective for the budgeting process of Hilltop Hospital, a not-for-profit community hospital, is to create cost awareness:

Monthly principle plus interest payment to the bank : How much is his monthly principle plus interest payment to the bank?

User Account

All Pages