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A company with EBIT of $5,000,000 is considering two financing alternatives. The first alternative would have $23 million of bonds at 7% interest and 900,000 common shares outstanding, whereas the second would have $45 million of bonds at 7% interest and only 700,000 shares outstanding. The company is in the 35% tax bracket. Required: A. Construct the bottom half of the income statement (including EPS) for each financing alternative when EBIT is at $5,000,000. B. Construct the bottom half of the income statement (including EPS) for each alternative if EBIT increases by 25%. c. Construct the bottom half of the income statement (including EPS) for each alternative if EBIT decreases by 25%. D. What is the EBIT/EPS indifference point for this firm?

A company with EBIT of $5,000,000 is considering two financing alternatives. The first alternative would have $23 million of bonds at 7% interest and 900,000 common shares outstanding, whereas the second would have $45 million of bonds at 7% interest and only 700,000 shares outstanding. The company is in the 35% tax bracket. Required: A. Construct the bottom half of the income statement (including EPS) for each financing alternative when EBIT is at $5,000,000. B. Construct the bottom half of the income statement (including EPS) for each alternative if EBIT increases by 25%. c. Construct the bottom half of the income statement (including EPS) for each alternative if EBIT decreases by 25%. D. What is the EBIT/EPS indifference point for this firm?

EBK CONTEMPORARY FINANCIAL MANAGEMENT
EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN:9781337514835
Author:MOYER
Publisher:MOYER
Chapter15: Dividend Policy
Section: Chapter Questions
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A company with EBIT of $5,000,000 is considering two financing alternatives. The first alternative would have $23 million of bonds at 7% interest and 900,000 common shares outstanding, whereas the second would have $45 million of bonds at 7% interest and only 700,000 shares outstanding. The company is in the 35% tax bracket. Required: A. Construct the bottom half of the income statement (including EPS) for each financing alternative when EBIT is at $5,000,000. B. Construct the bottom half of the income statement (including EPS) for each alternative if EBIT increases by 25%. C. Construct the bottom half of the income statement (including EPS) for each alternative if EBIT decreases by 25%. D. What is the EBIT/EPS indifference point for this firm? A Alternative #! Alternative #2 EBIT 5,000,000 5,000,000 Interest 1,610,000 3,150,000 Earnings before taxes 3,390,000 1,850,000 Income tax 1,186,500 647,500 Net income 2,203,500 1,202,500 Number of shares outstanding 900,000 700,000 Earnings per share 2.45 1.72 В Alternative #! Alternative #2 ЕBIT 6,250,000 6,250,000 Interest 1,610,000 3,150,000 Earnings before taxes 4,640,000 3,100,000 Income tax 1,624,000 1,085,000 Net income 3,016,000 2,015,000 Number of shares outstanding 900,000 700,000 Earnings per share 3.35 2.88 Alternative #! Alternative #2 EBIT 3,750,000 3,750,000 Interest 1,610,000 3,150,000 Earnings before taxes 2,140,000 600,000 Income tax 210.000 749,000 1,391,000 Net income 390,000 Number of shares outstanding 900,000 700,000 Earnings per share 1.55 0.56
Transcribed Image Text:A company with EBIT of $5,000,000 is considering two financing alternatives. The first alternative would have $23 million of bonds at 7% interest and 900,000 common shares outstanding, whereas the second would have $45 million of bonds at 7% interest and only 700,000 shares outstanding. The company is in the 35% tax bracket. Required: A. Construct the bottom half of the income statement (including EPS) for each financing alternative when EBIT is at $5,000,000. B. Construct the bottom half of the income statement (including EPS) for each alternative if EBIT increases by 25%. C. Construct the bottom half of the income statement (including EPS) for each alternative if EBIT decreases by 25%. D. What is the EBIT/EPS indifference point for this firm? A Alternative #! Alternative #2 EBIT 5,000,000 5,000,000 Interest 1,610,000 3,150,000 Earnings before taxes 3,390,000 1,850,000 Income tax 1,186,500 647,500 Net income 2,203,500 1,202,500 Number of shares outstanding 900,000 700,000 Earnings per share 2.45 1.72 В Alternative #! Alternative #2 ЕBIT 6,250,000 6,250,000 Interest 1,610,000 3,150,000 Earnings before taxes 4,640,000 3,100,000 Income tax 1,624,000 1,085,000 Net income 3,016,000 2,015,000 Number of shares outstanding 900,000 700,000 Earnings per share 3.35 2.88 Alternative #! Alternative #2 EBIT 3,750,000 3,750,000 Interest 1,610,000 3,150,000 Earnings before taxes 2,140,000 600,000 Income tax 210.000 749,000 1,391,000 Net income 390,000 Number of shares outstanding 900,000 700,000 Earnings per share 1.55 0.56
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