ADI Company currently has 100,000 shares of common stock outstanding with a market price of $60 per share. It also has 2 million dollars in 6% bond. The company is considering 3 million dollars expansion programthat can be financed with: 1) All common stock @ $ 60 per share 2) Bonds at 8% interest Requirements: a) For an expected EBIT level of $1 million after the expansion program, calculate earnings per share for each alternative methods of financing. Assume a tax rate of 50% b) Calculate the indifference points between alternatives. c) Calculate the financial breakeven point of each alternative.
ADI Company currently has 100,000 shares of common stock outstanding with a market price of $60 per share. It also has 2 million dollars in 6% bond. The company is considering 3 million dollars expansion programthat can be financed with: 1) All common stock @ $ 60 per share 2) Bonds at 8% interest Requirements: a) For an expected EBIT level of $1 million after the expansion program, calculate earnings per share for each alternative methods of financing. Assume a tax rate of 50% b) Calculate the indifference points between alternatives. c) Calculate the financial breakeven point of each alternative.
Chapter14: Capital Structure Management In Practice
Section: Chapter Questions
Problem 26P
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ADI Company currently has 100,000 shares of common stock outstanding with a market price of $60 per share. It also has 2 million dollars in 6% bond. The company is considering 3 million dollars expansion programthat can be financed with: 1) All common stock @ $ 60 per share 2) Bonds at 8% interest Requirements: a) For an expected EBIT level of $1 million after the expansion program, calculate earnings per share for each alternative methods of financing. Assume a tax rate of 50% b) Calculate the indifference points between alternatives. c) Calculate the financial breakeven point of each alternative. d) If expected EBIT for the near future is greater than your answer in part (b) what form of financing would you recommend.
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