Power Development Incorporation is expecting earnings before interest and taxes of P2 million for the next year. The cost of equity is 15%. The company has a long-term debt of P5,000,000 on which the firm pays 10%. One million ordinary shares are outstanding. The firm’s capital structure is funded by 40% debt and 60% equity. The applicable tax rate is 40%. Next year Power Development Inc. expects to fun its positive net present value project costing P1.2 million, on which the funding will be the same as the firm’s capital structure. Assume also that any new debt will also have an interest rate of 10%. The firm will follow a residual dividend model and no other projects will be funded next year. How much is earnings before taxes? How much of the project is funded by debt?
Power Development Incorporation is expecting earnings before interest and taxes of P2 million for the next year. The
How much is earnings before taxes?
How much of the project is funded by debt?
Step by step
Solved in 3 steps
