Your firm should raise $2 million so that the firm can make more profitable investments in...

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Finance

Your firm should raise $2 million so that the firm can make moreprofitable investments in inventory and fixed assets. This $2million investment will more than triple their capacity. The NPVfor this new investment is positive. Currently, the firm has nointerest bearing debt and no preferred stock outstanding. However,there are 20 thousand shares of common stock outstanding. Each ofthese common shares has a market value of $50. Furthermore, if thefirm wants to raise $2 million by selling stock, they can. Newcommon shares could be sold for $50 per share. On the other hand,they firm could raise this $2 million by selling debt. The interestrate that they would pay on this debt is equal to 8 percent. Goingforward the firm projects a gross profit margin of 40 percent onfuture sales, fixed operating costs equal to $60,000 per year, anda corporate tax rate equal to 35 percent. Calculate the crossoverpoint in both annual sales revenue and EPS.
a. $750,000 and $2.60 per share
b. $325,000 and $1.30 per share
c. $162,500 and $0.65 per share
d. $ 81,250 and $0.325 per share

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4.1 Ratings (523 Votes)

In this problem there is no process to find the actual revenue since only given that investment is more than triple there capacity which means sales revenue might be less than 13rd of 2 million So maximum should be 20000003666667 Evaluating Option A Revenue Suppose if Debt is raised Particulars amount Sales 750000 See Answer

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Your firm should raise $2 million so that the firm can make moreprofitable investments in inventory and fixed assets. This $2million investment will more than triple their capacity. The NPVfor this new investment is positive. Currently, the firm has nointerest bearing debt and no preferred stock outstanding. However,there are 20 thousand shares of common stock outstanding. Each ofthese common shares has a market value of $50. Furthermore, if thefirm wants to raise $2 million by selling stock, they can. Newcommon shares could be sold for $50 per share. On the other hand,they firm could raise this $2 million by selling debt. The interestrate that they would pay on this debt is equal to 8 percent. Goingforward the firm projects a gross profit margin of 40 percent onfuture sales, fixed operating costs equal to $60,000 per year, anda corporate tax rate equal to 35 percent. Calculate the crossoverpoint in both annual sales revenue and EPS.a. $750,000 and $2.60 per shareb. $325,000 and $1.30 per sharec. $162,500 and $0.65 per shared. $ 81,250 and $0.325 per share