The Lopez-Portillo Company has $10 million in assets, 80 percent financed by debt and 20 percent financed by common stock. The interest rate on the debt is 15 percent, and the stock book value is $10 per share. President Lopez-Portillo is considering two financing plans for an expansion to $15 million in assets. Under Plan A the debt-to-total-assets ratio will be maintained, but new debt will cost 18 percent! New stock will be sold at $10 per share. Under Plan B, only new common stock at $10 per share will be issued. The tax rate is 40 percent. a. If EBIT is 15 percent on total assets, compute earnings per share (EPS) before the expansion (current) and under the two alternatives after expansion. (Round the final answers to 2 decimal places.) Current Plan A Plan B $ $ S Current Plan A Plan B EPS b. What is the DFL under each of the three plans? (Round the final answers to 2 decimal places.) 09 047 09 OFL c. Using the formula provided in the chapter, calculate the EBIT/EPS indifference point between Plan A and Plan B. (Enter the answers in dollars not in millions.) $ EBIT d. If shares could be sold at $20 each due to increased expectations for the firm's sales and earnings, what impact would this have on EPS for the two expansion alternatives? Compute EPS for each. (Round the final answers to 2 decimal places.)
The Lopez-Portillo Company has $10 million in assets, 80 percent financed by debt and 20 percent financed by common stock. The interest rate on the debt is 15 percent, and the stock book value is $10 per share. President Lopez-Portillo is considering two financing plans for an expansion to $15 million in assets. Under Plan A the debt-to-total-assets ratio will be maintained, but new debt will cost 18 percent! New stock will be sold at $10 per share. Under Plan B, only new common stock at $10 per share will be issued. The tax rate is 40 percent. a. If EBIT is 15 percent on total assets, compute earnings per share (EPS) before the expansion (current) and under the two alternatives after expansion. (Round the final answers to 2 decimal places.) Current Plan A Plan B $ $ S Current Plan A Plan B EPS b. What is the DFL under each of the three plans? (Round the final answers to 2 decimal places.) 09 047 09 OFL c. Using the formula provided in the chapter, calculate the EBIT/EPS indifference point between Plan A and Plan B. (Enter the answers in dollars not in millions.) $ EBIT d. If shares could be sold at $20 each due to increased expectations for the firm's sales and earnings, what impact would this have on EPS for the two expansion alternatives? Compute EPS for each. (Round the final answers to 2 decimal places.)
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Ss.232.1
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