Calculate the earnings per share

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Problem - 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

(i) 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: EM132905288

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