Reference no: EM133106682

Question 1 - Computing interest tax? savings - Dharma Supply has earnings before interest and taxes? (EBIT) of $500,000?, interest expenses of ?$300,000?, and faces a corporate tax rate of 35 percent.

Required -

a. What is Dharma? Supply's net? income?

b. What would? Dharma's net income be if it? didn't have any debt? (and consequently no interest? expense)?

c. What are the? firm's interest tax? savings?

Question 2 - Analyzing coverage? ratios - The income statements for Home? Depot, Inc.? (HD), spanning the period? 2014-2016 (just before the housing? crash, so these are representative? years) are found? here:

Required -

a. Calculate the times interest earned ratio for each of the years for which you have data.

b. What is your assessment of how the? firm's ability to service its debt obligations has changed over this? period?

Question 3 - Leverage and? EPS - You have developed the following pro forma income statement for your? corporation:

Required -

It represents the most recent? year's operations, which ended yesterday. Your supervisor in the? controller's office has just handed you a memorandum asking for written responses to the following? questions:

a. If sales should increase by 25 ?percent, by what percent would earnings before interest and taxes and net income? increase?

b. If sales should decrease by 25 ?percent, by what percent would earnings before interest and taxes and net income? decrease?

c. If the firm were to reduce its reliance on debt financing such that interest expense were cut in? half, how would this affect your answers to parts A and B??

Question 4 - EBIT-EPS analysis - Three recent graduates of the computer science program at the University of Tennessee are forming a company that will write and distribute new application software for the iPhone. ? Initially, the corporation will operate in the southern region of? Tennessee, Georgia, North? Carolina, and South Carolina. A small group of private investors in the? Atlanta, Georgia area is interested in financing the startup company and two financing plans have been put forth for? consideration:

The first? (Plan A) is an? all-common-equity capital structure.

?$2.0 million dollars would be raised by selling common stock at $20 per common share.

Plan B would involve the use of financial leverage.

?$1.0 million dollars would be raised by selling bonds with an effective interest rate of 11.0 percent? (per annum), and the remaining ?$1.0 million would be raised by selling common stock at the ?$20 price per share. The use of financial leverage is considered to be a permanent part of the? firm's capitalization, so no fixed maturity date is needed for the analysis. A 30 percent tax rate is deemed appropriate for the analysis.

Required -

a. Find the EBIT indifference level associated with the two financing plans.

b. A detailed financial analysis of the? firm's prospects suggests that the? long-term EBIT will be above $300,000 annually. Taking this into? consideration, which plan will generate the higher? EPS?

Question 5 - Using EBIT-EPS? break-even analysis - Home? Depot, Inc.? (HD), had 1244 million shares of common stock outstanding in? 2016, whereas Lowes? Companies, Inc.? (LOW), had 929 million shares outstanding. Assuming Home? Depot's 2016 interest expense is ?$919 ?million, Lowes' interest expense is ?$552 ?million, and a 35 percent tax rate for both? firms, what is their? break-even level of operating income? (i.e., the level of EBIT where EPS is the same for both? firms)?