After graduating from school, you decide to set up your own company, requiring a $100,000...
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After graduating from school, you decide to set up your own company, requiring a $100,000 initial investment capital. You can bring that money yourself (making you thus hold 100,000 shares of $1). Alternatively, you could borrow $60,000 at an interest rate of 4.5% per annum and thus only bring in $40,000 of your own money. Assume no depreciation and tax rate is 35%. a) If the estimated annual earnings before interests and taxes (EBIT) for your business is $11,000, which financing alternative would you adopt? b) Looking at the EPS, what is the EBIT indifference level of your business if you opt for the debt + equity financing? c) Explain your results in (b) and the risks you may expose to.
After graduating from school, you decide to set up your own company, requiring a $100,000 initial investment capital. You can bring that money yourself (making you thus hold 100,000 shares of $1). Alternatively, you could borrow $60,000 at an interest rate of 4.5% per annum and thus only bring in $40,000 of your own money. Assume no depreciation and tax rate is 35%.
a) If the estimated annual earnings before interests and taxes (EBIT) for your business is $11,000, which financing alternative would you adopt?
b) Looking at the EPS, what is the EBIT indifference level of your business if you opt for the debt + equity financing?
c) Explain your results in (b) and the risks you may expose to.
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