Reference no: EM132912384
Question - Sleeman Ltd has a capital structure of:
Ordinary shares 6,000,000@$1 $6,000,000 10% debentures $8,000,000
$14,000,000
The company is considering a $6 million expansion program that it can finance with one of the following options:
All ordinary shares at $1.50 per share. The current market price is $1.80 per share.
12% debentures for $2,000,000 and 10$ preference shares for $4,000,000.
Half ordinary shares at $1.50 per share and half 12% debentures.
The company tax rate is 30%.
Required -
(a) Calculate the earnings per share, for each of the alternative methods of finance, for an EBIT of $5,000,000, which is expected earnings after the expansion.
(b) Construct an EBIT-EPS chart indicating points of indifference
(c) Determine mathematically the indifference points between:
(d) Calculate the degree of financial leverage for each option.
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