Currently half of assets are financed with long-term debt

Assignment Help Financial Management

Reference no: EM131306305

Edsel Research Labs has $27.80 million in assets. Currently half of these assets are financed with long-term debt at 7 percent and half with common stock having a par value of $10. Ms. Edsel, the vice-president of finance, wishes to analyze two refinancing plans, one with more debt (D) and one with more equity (E). The company earns a return on assets before interest and taxes of 9 percent. The tax rate is 35 percent. Under Plan D, a $6.95 million long-term bond would be sold at an interest rate of 10 percent and 695,000 shares of stock would be purchased in the market at $10 per share and retired. Under Plan E, 695,000 shares of stock would be sold at $10 per share and the $6,950,000 in proceeds would be used to reduce long-term debt. (a-1) How would each of these plans affect earnings per share? Note that due to tax loss carry-forwards and carry-backs, negative taxes can occur. (Negative amounts should be indicated by a minus sign. Leave no cells blank - be certain to enter "0" wherever required. Enter your answers in dollars not in millions. Round your answers to 2 decimal places. Omit the "$" sign in your response.) Earnings per share Current $ Plan D $ Plan E $ (a-2) Which plan(s) would produce the highest EPS? Plan D Current Plan and Plan D Plan E (b) Which plan would be most favorable if return on assets increased to 14 percent? Current Plan Plan D Plan E (c) Assuming return on assets is back to the original 9 percent, but the interest rate on new debt in Plan D is 6 percent, which of the three plans will produce the highest EPS? Current Plan and Plan D Plan D Plan E.

Reference no: EM131306305

Questions Cloud

Blue widget division marketing plan : preparing the marketing plan, including the blue highlighted text, before submitting your assignments, Eureka Inc. - Blue Widget Division Marketing Plan

Foreseeable future-the real risk-free rate of interest : In the foreseeable future, the real risk-free rate of interest, r*, is expected to remain at 3%, inflation is expected to steadily increase, and the maturity risk premium is expected to be 0.1(t 1)%, where t is the number of years until the bond matu..

Minimum salvage value of those family theater devices : Britney is a big fan of movie. She installed a family theater in her basement which costed her ?$2,300. With this family? theater, she does not need to go to the theater which can save her $360 per year for seven years. The minimal acceptable rate of..

Discuss about the jewish-moroccan bakkashot : List the Similarities and Differences between Jewish-Moroccan ‘Bakkashot' and JewishOttoman ‘Maftirim'.

Currently half of assets are financed with long-term debt : Edsel Research Labs has $27.80 million in assets. Currently half of these assets are financed with long-term debt at 7 percent and half with common stock having a par value of $10. Ms. Edsel, the vice-president of finance, wishes to analyze two refin..

Find some banks in your region and study them : Find some banks in your region and study them. Do these banks offer any services your current bank does not offer? How do these other banks in your region compare to your current bank?

How realistic is this assumption : Why should a time-based authentication system invalidate the current password on a successful authentication?

Why do you think the yields vary with the maturity : How does the yield on Treasury securities with longer maturities differ from the yield on Treasury securities with shorter yields? Why do you think the yields vary with the maturity?

What are the specific behavioural competencies : FNS40815 CERTIFICATE IV IN FINANCE AND MORTGAGE BROKING - ASSESSMENT TASKS. It is important that staff should deliver an outstanding customer experience at all times. What are the specific behavioural competencies that this requires and how would t..

User Account

All Pages