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What degree of financial leverage under each of three plans

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Point 1: The Lopez-Portillo Company has $11.2 million in assets, 60 percent financed by debt and 40 percent financed by common stock. The interest rate on the debt is 9 percent and the par value of the stock is $10 per share. President Lopez-Portillo is considering two financing plans for an expansion to $21 million in assets.

Point 2: Under Plan A, the debt-to-total-assets ratio will be maintained, but new debt will cost a whopping 12 percent. Under Plan B, only new common stock at $10 per share will be issued. The tax rate is 40 percent. eBook

Question a. If EBIT is 10 percent on total assets, compute earnings per share (EPS) before the expansion and under the two alternatives. (Round your answers to 2 decimal places.)

Question b. What is the degree of financial leverage under each of the three plans? (Round your answers to 2 decimal places)

Reference no: EM132476721

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