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.)

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
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Ss.232.1

 

Current
Plan A
Plan B
Current
Plan A
Plan B
$
$
b. What is the DFL under each of the three plans? (Round the final answers to 2 decimal places.)
Plan & Shares
Plan B Shares
EPS
$
09
047
09
DEL
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.)
EPS
e. Calculate the EBIT/EPS indifference point at the new share price. (Enter the answers in dollars not in millions.)
EBIT
S
f. This part of the question is not part of your Connect assignment.
Transcribed Image Text:Current Plan A Plan B Current Plan A Plan B $ $ b. What is the DFL under each of the three plans? (Round the final answers to 2 decimal places.) Plan & Shares Plan B Shares EPS $ 09 047 09 DEL 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.) EPS e. Calculate the EBIT/EPS indifference point at the new share price. (Enter the answers in dollars not in millions.) EBIT S f. This part of the question is not part of your Connect assignment.
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.)
Transcribed Image Text: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.)
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