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Calculate the earnings per share

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Question - The directors of Excelsior Corporation are considering expansion of the company. The company will need $500,000 to finance this expansion. The existing capital structure comprises 1,000,000 ordinary shares of $1 and no interest bearing debt.

Three methods of financing are under consideration:

(i) Issue 500,000 ordinary shares of $1.00 each

(ii) Issue 13% Debentures.

(iii) Issue 250,000 ordinary shares of $1 each and $250,000 13% debentures

The company's tax rate is 30%.

Required -

(a) Calculate the earnings per share under each alternative assuming earnings before interest and taxes are $400,000.

(b) Calculate the degree of financial leverage for each proposal.

(C) Calculate the indifference point using (EBIT) between alternatives (1) and (2). Explain the meaning of your answer.

Reference no: EM132901816

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