Logo
Home Study Material Contact Search
AI Chat FREE
  1. business
  2. accounting
  3. *****please explain how to get each part of the eq

*****Please explain how to get each part of the equation! The formula needed is EPS...

50.1K

Verified Solution

Question

Accounting

*****Please explain how to get each part of the equation! The formula needed is EPS = ((EBIT - I)(1 - t) - P)/ S , however I don't understand how to get I or S, so please explain! Thank you!!!

You are the CFO of Expo Corporation, a $20 million firm that is financed with $16 million in equity and $4 million in debt. The firms equity consists of 320,000 shares of common stock with a price of $50 per share. Expo has no preferred stock. The firms $4 million in debt has a coupon interest rate of 6%.You have decided to invest in a very promising $10 million capital investment project. Now you need to think about how to finance it. You can sell 200,000 shares of common stock at the current price of $50 per share, or you can just borrow the capital with a $10 million bond issue. The new bonds would have a coupon interest rate of 8%. Assume a 34% corporate tax rate.a)Find the break-even EBIT for your project.b)Calculate your firms EPS at the break-even EBIT.c)If your future EBIT is $4 million, which financing plan would give Expo the highest EPS?

image

Stock Financing (EBIT-1 (1-t) - P S = Debt Financing (EBIT-1 (1-t) - P S (EBIT-240,000) (.66) 520,000 - (EBIT-1,040,000)(.66) 320,000 .2112 EBIT - 50,688 .3432 EBIT - 356,928 EBIT = $2,320,000

Answer & Explanation Solved by verified expert
Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:
  • Unlimited Question Access with detailed Answers
  • Zin AI - 3 Million Words
  • 10 Dall-E 3 Images
  • 20 Plot Generations
  • Conversation with Dialogue Memory
  • No Ads, Ever!
  • Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!
Become a Member

Other questions asked by students