After yesterday’s board meeting, Albany Construction Limited (ACL) agreed to change its current capital structure. The...

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After yesterday’s board meeting, Albany Construction Limited(ACL) agreed to change its current capital structure. The currentcapital structure of ACL is based on the view that no debt or a lowlevel of debt is better than a high level of debt. Due to a changein the global business environment, ACL board members now believethat a high level of debt is necessary for the future growth of thecompany. ACL currently has a $200,000 long-term bank loan paying 9%interest. It also has 80,000 ordinary shares on issue under thecurrent structure. The proposed capital structure will double theamount of the current bank loan to $400,000, but ACL will need topay 12% interest. With this change, the number of ordinary shareson issue would reduce to 40,000 shares. ACL operates in theconstruction industry and the proposed capital structure is basedon the industry average. ACL pays 28% tax on its income. Required:A. Assuming ACL expects EBIT of $120,000, what are the EPS for thecurrent and proposed capital structures? Explain whether or not theboard has made the right decision and justify your answer. [4marks] B. Calculate the EBIT/EPS indifference point for EBIT. [3marks] C. If ACL wishes to attain the highest EPS, over which rangeof EBIT is each capital structure preferred? [2 marks] D. Brieflyexplain the major shortcoming of EBIT/EPS analysis.

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A If ACL expects EBIT of 120000 calculation for current capital structure Capital Structure Calculations EBIT 120000 Interest 9 18000 EBT 102000 TAX 28 28560 PAT 73440 No of Shares 80000 Earnings Per Share 0918 profit after taxno of shares Proposed capital Structure Capital Structure Calculations EBIT 120000 Interest 12 48000 Loan amount 400000 EBT 72000 TAX 28 20160 PAT 51840 No of Shares 40000 Earnings Per Share 1296 profit after taxno of shares The board See Answer

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After yesterday’s board meeting, Albany Construction Limited(ACL) agreed to change its current capital structure. The currentcapital structure of ACL is based on the view that no debt or a lowlevel of debt is better than a high level of debt. Due to a changein the global business environment, ACL board members now believethat a high level of debt is necessary for the future growth of thecompany. ACL currently has a $200,000 long-term bank loan paying 9%interest. It also has 80,000 ordinary shares on issue under thecurrent structure. The proposed capital structure will double theamount of the current bank loan to $400,000, but ACL will need topay 12% interest. With this change, the number of ordinary shareson issue would reduce to 40,000 shares. ACL operates in theconstruction industry and the proposed capital structure is basedon the industry average. ACL pays 28% tax on its income. Required:A. Assuming ACL expects EBIT of $120,000, what are the EPS for thecurrent and proposed capital structures? Explain whether or not theboard has made the right decision and justify your answer. [4marks] B. Calculate the EBIT/EPS indifference point for EBIT. [3marks] C. If ACL wishes to attain the highest EPS, over which rangeof EBIT is each capital structure preferred? [2 marks] D. Brieflyexplain the major shortcoming of EBIT/EPS analysis.