ABC Limited is an all-equity firm and has a present capital structure of 10 million shares of common stock, which trades at $12 per share. The company is contemplating an expansion programme that requires a capital cost of $18 million. Two alternative financing plans are under consideration: Plan 1-(Equity financing). Sale of 1.5 million additional shares of common stock. Plan 2 (Debt financing). Issue $18.0 million in 12% Long-term debt. The firm’s marginal rate of tax is 35 percent. You are required to: a. Determine the break-even EBIT, given the two financing plans. b. Suppose ABC Limited’s EBIT is likely to be $24 million. Which alternative financing plan would you recommend, assuming you want to maximize EPS?

ABC Limited is an all-equity firm and has a present capital structure of 10 million shares of common stock, which trades at $12 per share. The company is contemplating an expansion programme that requires a capital cost of $18 million. Two alternative financing plans are under consideration: Plan 1-(Equity financing). Sale of 1.5 million additional shares of common stock. Plan 2 (Debt financing). Issue $18.0 million in 12% Long-term debt. The firm’s marginal rate of tax is 35 percent. You are required to: a. Determine the break-even EBIT, given the two financing plans. b. Suppose ABC Limited’s EBIT is likely to be $24 million. Which alternative financing plan would you recommend, assuming you want to maximize EPS?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter14: Capital Structure Management In Practice

Section: Chapter Questions

Problem 20P

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IRIS Corp. has determined its optimal capital structure as image Debt: The firm can sell a 10-year, $1,000 par value, 7 percent bond for $950. A flotation cost of 3percent of the par value would be required in addition to the discount of $50. Preferred Stock: The firm has determined it can issue preferred stock at $45 per share par value. The stock will pay an $6.5 annual dividend. The cost of issuing and selling the stock is $2.5 per share. Common Stock: The firm's common stock is currently selling for $25 per share. The dividend expected to be paid at the end of the coming year is $3.75. Its dividend payments have been growing at a constant rate for the last five years. Five years ago, the dividend was $1.45. It is expected that to sell, a new common stock issue must be underpriced at $2 per share and the firm must pay $0.75 per share in flotation costs. Additionally, the firm's marginal tax rate is 20 percent. Calculate the firm's weighted average cost of capital assuming the firm…
IRIS Corp. has determined its optimal capital structure as image Debt: The firm can sell a 10-year, $1,000 par value, 7 percent bond for $950. A flotation cost of 3percent of the par value would be required in addition to the discount of $50. Preferred Stock: The firm has determined it can issue preferred stock at $45 per share par value. The stock will pay an $6.5 annual dividend. The cost of issuing and selling the stock is $2.5 per share. Common Stock: The firm's common stock is currently selling for $25 per share. The dividend expected to be paid at the end of the coming year is $3.75. Its dividend payments have been growing at a constant rate for the last five years. Five years ago, the dividend was $1.45. It is expected that to sell, a new common stock issue must be underpriced at $2 per share and the firm must pay $0.75 per share in flotation costs. Additionally, the firm's marginal tax rate is 20 percent. Calculate the firm's weighted average cost of capital assuming the firm…
IRIS Corp. has determined its optimal capital structure as image Debt: The firm can sell a 10-year, $1,000 par value, 7 percent bond for $950. A flotation cost of 3percent of the par value would be required in addition to the discount of $50. Preferred Stock: The firm has determined it can issue preferred stock at $45 per share par value. The stock will pay an $6.5 annual dividend. The cost of issuing and selling the stock is $2.5 per share. Common Stock: The firm's common stock is currently selling for $25 per share. The dividend expected to be paid at the end of the coming year is $3.75. Its dividend payments have been growing at a constant rate for the last five years. Five years ago, the dividend was $1.45. It is expected that to sell, a new common stock issue must be underpriced at $2 per share and the firm must pay $0.75 per share in flotation costs. Additionally, the firm's marginal tax rate is 20 percent. Calculate the firm's weighted average cost of capital assuming the firm…