Reference no: EM133068465
Apc Lab is a company that operates in the domain of AR and VR for sports. It is considering additional financing of Rs.10,000. It currently has Rs.50,000 of debt with interest rate of 12% per annum and 10,000 shares of common stock outstanding. The firm can obtain the financing through borrowing at an interest rate of 12% per annum or through the sale of 1000 shares of common stock (i.e. equity financing). The firm has a 40% tax rate.
(a.) Calculate the EPS (Earnings per Share), for each of the financing plan, in the following two scenarios:
(i.) Scenario I - EBIT (Earnings before Interest and Taxes) is Rs.10,000;
(ii.) Scenario II - EBIT (Earnings before Interest and Taxes) is Rs.30,000 Note that while doing the calculations also consider the pre-existing debt and equity over and above the new financing taken.
(b.) make a plot of EPS (y-axis) vs EBIT (x-axis) for each of the financing plan.
(c.) On the basis of your graph in part (b.), at what level of EBIT does the plan to borrow becomes superior (i.e. better in terms of EPS generated) to the plan to issue shares?
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