The Lopez-Portillo Company has $12.1 million in assets, 90 percent financed by debt and 10 percent financed by common stock. Theinterest rate on the debt is 11 percent and the par value of the stock is $10 per share. President Lopez-Portillo is considering twofinancing plans for an expansion to $25.5 million in assets.Under Plan A, the debt-to-total-assets ratio will be maintained, but new debt will cost a whopping 13 percent! Under Plan B, only newcommon stock at $10 per share will be issued. The tax rate is 40 percent.a. If EBIT is 12 percent on total assets, compute earnings per share (EPS) before the expansion and under the two alternatives.Note: Round your answers to 2 decimal places.CurrentPlan APlan BEarnings perShareb. What is the degree of financial leverage under each of the three plans?Note: Round your answers to 2 decimal places.CurrentPlan APlan BDegree of FinancialLeveragec. If stock could be sold at $20 per share due to increased expectations for the firm's sales and earnings, compute earnings per sharefor each alternative.Note: Round your answers to 2 decimal places.Plan APlan BEarnings perShare

EPS (Earnings Per Share) is a key metric indicating the amount of profit a company generates for…

Answered: The Lopez-Portillo Company has $12.1…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter16: Working Capital Policy And Short-term Financing

Section: Chapter Questions

Problem 5P

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The Lopez-Portillo Company has $10.6 million in assets, 80 percent financed by debt and 20 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 $18 million in assets. 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. If EBIT is 9 percent on total assets, compute earnings per share (EPS) before the expansion and under the two alternatives. Note: Round your answers to 2 decimal places. What is the degree of financial leverage under each of the three plans? Note: Round your answers to 2 decimal places. If stock could be sold at $20 per share due to increased expectations for the firm's sales and earnings, compute earnings per share for each alternative. Note: Round your answers to 2…
Dickinson Company has $12,020,000 million in assets. Currently half of these assets are financed with long-term debt at 10.1 percent and half with common stock having a par value of $8. Ms. Smith, Vice President of Finance, wishes to analyze two refinancing plans, one with more debt (D) and one with more equity (E). The company earns a return on assets before interest and taxes of 10.1 percent. The tax rate is 40 percent. Tax loss carryover provisions apply, so negative tax amounts are permissable. Under Plan D, a $3,005,000 million long-term bond would be sold at an interest rate of 12.1 percent and 375,625 shares of stock would be purchased in the market at $8 per share and retired. Under Plan E, 375,625 shares of stock would be sold at $8 per share and the $3,005,000 in proceeds would be used to reduce long-term debt. a. How would each of these plans affect earnings per share? Consider the current plan and the two new plans. b-1. Compute the earnings per share if return on…
The Haris - Arshi Company is attempting to establish a current assets polıcy. Company has allocated $900,000 to fixed assets and the firm plans to maintain a 50 percent debt to assets a ratio. The interest rate is 10% on all debts. Company is considering three alternative current asset policies: this can be 40, 50 or 60 percent of projected sales. The company expects to earn 20 percent profit before interest and taxes on sales of $3 million. Company's effective federal-plus-state-tax rate is 15 percent. What is the expected return on equity under each alternative? Drawa descriptive conclusion for each Current ASset Investment Policy.
Refi Corporation is planning to repurchase part of its common stock by issuing corporate debt. As a result, the firm's debt-equity is expected to rise from 35 percent to 50 percent. The firm currently has $2.7 million worth of debt outstanding. The pretax cost of debt is 6.4 percent. The firm expects to have an aftertax earnings of $940,000 per year in perpetuity. The corporate tax rate is 21 percent. a. What is the expected return on the equity before the repurchase agreement? b. What is the return on assets for the firm? (Hint: use the MM Proposition ll with Tax.) c. What is the expected return on the firm's equity after the repurchase announcement? d. What is the weighted-average cost of capital for the company after the repurchase announcement?.
Edsel Research Labs has $28.20 million in assets. Currently half of these assets are financed with long-term debt at 5 percent and half with common stock having a par value of $10. Ms. Edsel, the Vice President of Finance, wishes to analyze two refinancing plans, one with more debt (D) and one with more equity (E). The company earns a return on assets before interest and taxes of 5 percent. The tax rate is 30 percent. Under Plan D, a $7.05 million long-term bond would be sold at an interest rate of 7 percent and 705,000 shares of stock would be purchased in the market at $10 per share and retired. Under Plan E, 705,000 shares of stock would be sold at $10 per share and the $7,050,000 in proceeds would be used to reduce long-term debt. a-1. How would each of these plans affect earnings per share? Consider the current plan and the two new plans. (Round your answers to 2 decimal places.) Earnings per Share Current Plan D Plan E a-2. Which…
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The Calgary Company is attempting to establish a current assets policy. Fixed assets are $600,000, and the firm plans to maintain a 40 percent debt-to-assets ratio. Calgary has no operating current liabilities. The interest rate is 12 percent on all debt. Three alternative current asset policies are under consideration: 40, 50, and 60 percent of projected sales. The company expects to earn 18 percent before interest and taxes on sales of $6 million. Calgary’s effective tax rate is 40 percent. What is the expected return on equity under each alternative? Evaluate ROE from owner point of view and suggest which option is best for him? Suggest which option would you like if you are managers of the company and do not have much concern about business? Why current assets policy is important in this particular situation?
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The Calgary Company is attempting to establish a current assets policy. Fixed assets are $600,000, and the firm plans to maintain a 40 percent debt-to-assets ratio. Calgary has no operating current liabilities. The interest rate is 12 percent on all debt. Three alternative current asset policies are under consideration: 40, 50, and 60 percent of projected sales. The company expects to earn 18 percent before interest and taxes on sales of $6 million. Calgary’s effective tax rate is 40 percent. Questions What is the expected return on equity under each alternative and why current assets policy is important in this particular situation? Evaluate ROE from owner point of view and suggest which option is best for him? Suggest which option would you like if you are managers of the company and do not have much concern about business?
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Quigley Inc. is considering two financial plans for the coming year. Management expects sales to be $335,000, operating costs to be $290,000, assets (which is equal to its total invested capital) to be $210,000, and its tax rate to be 25%. Under Plan A it would finance the firm using 25% debt and 75% common equity. The interest rate on the debt would be 8.8%, but under a contract with existing bondholders the TIE ratio would have to be maintained at or above 4.2. Under Plan B, the maximum debt that met the TIE constraint would be employed. Assuming that sales, operating costs, assets, total invested capital, the interest rate, and the tax rate would all remain constant, by how much would the ROE change in response to the change in the capital structure? Do not round your intermediate calculations.
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