Calculate the percentage change in EPS

Reference no: EM132368589

Corporate Finance Questions -

Question 1 - Money Inc., has no debt outstanding and a total market value of $275,000. Earnings before interest and taxes, EBIT, are projected to be $21,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 25% higher. If there is a recession, then EBIT will be 40 percent lower. Money is considering a $99,000 debt issue with an interest rate of 8 percent. The proceeds will be used to repurchase shares of stock. There are currently 5000 shares outstanding. Ignore taxes for this problem. Calculate earnings per share, EPS, under each of the three economic scenarios before any debt is issued. Also calculate the percentage change in EPS when the economy expands or enters a recession.

Question 2 - Kolby Corp. is comparing two different capital structures. Plan I would result in 900 shares of stock and $65,700 in debt. Plan II would result in 1,900 shares of stock and $29,200 in debt. The interest rate on the debt is 10 percent.

a. Ignoring taxes compare both of these plans to an all-equity plan assuming that EBIT will be $8,500. The all equity would result in 2700 shares outstanding. Which of the three plans has the highest EPS? The lowest?

b. In part (a) what the break-even levels of EBIT for each plan compared to that for an all-equity plan? Is one higher than the other? Why?

c. Ignoring taxes, when will EPS be identical for plans I and II?

Question 3 - ABC Co. and XYZ Co. are identical firms in all respects except for their capital structure. ABC is all equity financed with $750,000 in stock. XYZ uses both stock and perpetual debt, its stock is worth $375,000 and the interest rate on its debt is 8 percent. Both firms expect EBIT to be $86,000. Ignore taxes.

a. Richard owns $30,000 worth of XYZ's stock. What rate of return is he expecting?

b. Show how Richard could generate exactly the same cash flows and rate of return by investing in ABC using homemade leverage.

c. What is the cost of equity for ABC? What is it for XYZ?

d. What is the WACC for ABC? For XYZ? What principle have you illustrated?

Reference no: EM132368589

Questions Cloud

What topic you considering using for your persuasive speech : First, let us know what topic are you considering using for your persuasive speech? Why do you think that topic will be an appropriate choice for.

Impact on us management with future strategies : The gap between rich and poor people (the distribution/inequality of wealth and income) in America and globally; and its impact on US management

What type of company or product : What type of company or product uses just in time ordering?

How politics in health care organization motivates employees : Assess how politics in a health care organization motivates and demotivates employees, and recommend strategies to mitigate the challenges presented with each.

Calculate the percentage change in EPS : Calculate earnings per share, EPS, under each of the three economic scenarios before any debt is issued. Also calculate the percentage change in EPS

How would interpret the myths and realities of older adults : Throughout this course we examined development through the lens of the life-span. For this week we took a closer look at older adults. The perceptions.

Compute the incremental net income of the investment : The Best Manufacturing Company is considering a new investment. Compute the incremental net income of the investment for each year

Without a successful year from our sales? team : After? all, our sales team brings in? revenue, and without revenue the company would not be able to function.

Explain investment appraisal techniques - Payback Period : Explain the Net Present Value and Payback Period investment appraisal techniques and discuss their decision criteria

User Account

All Pages