G
Gunther
EBIT-EPS Analysis
A corporation currently has a debt ratio of 55%. Management is considering
changing the debt ratio by increasing it to 65%. It wishes to undertake a
new project that requires 1200 million dollars to fund. Given their current
financial obligations, analyze the financing of the new project under both
the current debt ratio of 55% and thenewly recommended debt ratio of 65%.
A)Use the EBIT-EPS analytical technique to determine the break-even EBIT and
the break even EPS.
B)Graph the EBIT-EPS lines for the two plans. Label the axes, B-E point and
identify each line. If the corporation expects next year's EBIT to be $4500
million, C)which debt ratio would optimize shareholder wealth (render the
higher EPS)?
D)What woul next years EPS be if the company used then optimal debt
structure to procure the necessary 1200 million dollars for teh new project?
A) What is the Break-Even EBIT and Break-even EPS?
B)The graph.
C)What is the optimal plan?
D)What is the optimal plan for next year?
Current Financial Obligations:
$6300 million in corporate bonds @ 8.0%
Preferred stock outstanding of 10.0 million shares @ $2.00
share dividend
1560 million shares of common stock issued
current tax rate of 40%
Plan A: New project financing of 1200 million dollars with a debt ratio of 55%
New corporate bonds of 660 mmillion dollars @9.0%
No new preferred stock issues.
150 million shares of common stock
current tax rate of 40%
Plan B: New project financing of 1500 million dollars with adebt ratio of 65%.
New corporate bonds of 780 million million dollars at 10%.
No new preferred stock issue.
100 million new shares of common stock
current tax rate of 40%
I have calculated that the EBIT is 1232.8667 and the joint EPS is .2232. but
that is as far as I get. Any guidance woul be greatly appreciated.
A corporation currently has a debt ratio of 55%. Management is considering
changing the debt ratio by increasing it to 65%. It wishes to undertake a
new project that requires 1200 million dollars to fund. Given their current
financial obligations, analyze the financing of the new project under both
the current debt ratio of 55% and thenewly recommended debt ratio of 65%.
A)Use the EBIT-EPS analytical technique to determine the break-even EBIT and
the break even EPS.
B)Graph the EBIT-EPS lines for the two plans. Label the axes, B-E point and
identify each line. If the corporation expects next year's EBIT to be $4500
million, C)which debt ratio would optimize shareholder wealth (render the
higher EPS)?
D)What woul next years EPS be if the company used then optimal debt
structure to procure the necessary 1200 million dollars for teh new project?
A) What is the Break-Even EBIT and Break-even EPS?
B)The graph.
C)What is the optimal plan?
D)What is the optimal plan for next year?
Current Financial Obligations:
$6300 million in corporate bonds @ 8.0%
Preferred stock outstanding of 10.0 million shares @ $2.00
share dividend
1560 million shares of common stock issued
current tax rate of 40%
Plan A: New project financing of 1200 million dollars with a debt ratio of 55%
New corporate bonds of 660 mmillion dollars @9.0%
No new preferred stock issues.
150 million shares of common stock
current tax rate of 40%
Plan B: New project financing of 1500 million dollars with adebt ratio of 65%.
New corporate bonds of 780 million million dollars at 10%.
No new preferred stock issue.
100 million new shares of common stock
current tax rate of 40%
I have calculated that the EBIT is 1232.8667 and the joint EPS is .2232. but
that is as far as I get. Any guidance woul be greatly appreciated.