Trade-offs management has to make between zero debt

Assignment Help Operation Management

Reference no: EM131810994

The StayDry Umbrella Corporation will have an EBIT of $100,000 if there is a normal amount of rain this year. But if there is a drought, they will have an EBIT of only $50000. The interest rate on debt is 10%, and the tax rate they pay is 35%. They do not pay any preferred dividends.

A) If StayDry has zero debt and 50,000 outstanding shares, what will their EPS (earnings per share) be if there is normal rain? What will their EPS be if there is a drought? What is their DFL (degree of financial leverage)?

B) Now suppose StayDry has decided to take on $300,000 in debt and has used these funds to buy pack half of the outstanding shares so now there are only 25,000 outstanding shares. What is the new EPS and DFL for both normal rain and drought?

C) Based on your answers to a) and b) above, what are the trade-offs management has to make between zero debt or $300,000 in debt? What are the benefits and disadvantages of taking on this debt?

Reference no: EM131810994

Questions Cloud

Call the purchase of different securities in a portfolio : What do you call the purchase of different securities in a portfolio and why is it important?

Balance of inventory and balance of depreciation : What is the balance of inventory and the balance of depreciation on Brenda's Bar and Grill’s balance sheet?

What does the term miss mean : In reference to quarterly financial statements - What does the term “MISS” mean?

Fixed assets classified as five-year property for macrs : Better Beverages purchased some fixed assets classified as five-year property for MACRS.

Trade-offs management has to make between zero debt : what are the trade-offs management has to make between zero debt or $300,000 in debt? What are the benefits and disadvantages of taking on this debt?

About to finance these long terms projects that will cost : How does the President goes about to finance these long terms projects that will cost between $30 million to $50 million?

How low will it take to reach your goal : Upon graduate from college, you make an annually salary of 49, 944.You set a goal to double in the future. how low will it take to reach your goal?

Cover the firm short-term financial liabilities : Which of the following measures refers to the amount of cash held above and beyond that which is required to cover the firm's short-term financial liabilities?

Calculate the duration and convexity : Calculate the duration and convexity of a 10-year Treasury note with a 4% coupon, trading at 99:8. Use a 20 basis point shock for the calculation.

User Account

All Pages