Firm A wants to finance $5 million to support its new strategic plan. The firm...
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Accounting
Firm A wants to finance $5 million to support its new strategic plan. The firm expects that it will be able to generate $2 million in EBIT in the first year of implementing the strategy. The current stock price of Firm A is $10 and it has 1 million shares outstanding. The firm expects that it will be able to borrow money at 7% annual interest. Tax rate is 30%.
Answer the following questions.
1. Firm A considers raising the entire amount using debt.
- How much interest does the firm need to pay in the first year? (3 points)
- What is the level of net income (EAT) if the firm uses this financing method? (3 points)
- What is the resulting EPS if the firm uses this financing method? (4 points)
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