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Firdavs [7]
3 years ago
5

Franklin corporation is comparing two different capital structures, an all equity plan (plan 1) and a levered plan (plan 2). Und

er plan 1, the company would have 315,000 shares of stock outstanding. Under plan 2, there would be 225,000 shares outstanding and $4.14 million in debt outstanding. The interest rate on the debt is 10 percent and there are no taxes.
A)If EBIT is $750,000, which plan will result in the highest EPS?

B)What is the break even EBIT?
Business
1 answer:
strojnjashka [21]3 years ago
3 0

Answer:

All equity firm will get 2.38 EPS while leverage firm 1.49

Break Even EBIT 1,449,000

Explanation:

EBIT 750,000

interest rate 10%

(there are no taxes thus, we do not make the distinction between after and pre-tax cost of debt)

4,140,000 x 0.1 = 414,000  interest expense

net income 336,000

outstanding shares 225,000

EPS = \frac{income-}{outstanding \: common \: stock}

EPS 1.49333

All equty: 750,000 / 315,000 = 2,38

Break Even EBIT:

The point at which is indiferent to be equity or levered firm:

Levered Firm EPS = Equity Firm EPS

(EBIT - 414,000)/225,000 = EBIT / 315,000\\EBIT/225,000 -414,000/225,000 =  EBIT/315,000\\EBIT/225,000 - EBIT/315,000  =  414,000/225,000\\EBIT = 1.84 / (1/225,000 - 1/315,000)\\

Break Even EBIT 1,449,000

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Ethier Enterprise has an unlevered beta of 1. Ethier is financed with 55% debt and has a levered beta of 1.1. If the risk free r
tresset_1 [31]

Answer:

The correct answer is 0.4%.

Explanation:

According to the scenario, the computation for the given data are as follows:

If no debt, then required return can be calculated by using following formula:

Required return ( no debt) = Risk free rate + Unlevered Beta × Market risk premium

= 6% + 1 × 4%

= 0.06 + 0.04

= 0.10 or 10%

If debt, then required return can be calculated by using following formula:

Required return ( with debt) = Risk free rate + levered Beta × Market risk premium

= 6% + 1.1 × 4%

= 0.06 + 0.044

= 0.104 or 10.4%

So, extra premium required = 10.4% - 10% = 0.4%

6 0
3 years ago
Increasing and decreasing the decimal option on Excel is intended for:
liraira [26]

Answer:

i think its C

Explanation:

3 0
3 years ago
Klingon Widgets, Inc., purchased new cloaking machinery three years ago for $5.4 million. The machinery can be sold to the Romul
Semmy [17]

Answer:

a. $5,194,000

b. $7,715,000

Explanation:

a. Book Value of assets = Book value of fixed assets + book value of current assets

Book Value of assets = Book value of fixed assets + (Current Liabilities + Net working capital)

Book Value of assets = $4,200,000 + ($850,000 + $144,000)

Book Value of assets = $5,194,000

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JulsSmile [24]
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tigry1 [53]

Answer:

b. rising interest rates.

Explanation:

A bond can be defined as a debt or fixed investment security, in which a bondholder (creditor or investor) loans an amount of money to the bond issuer (government or corporations) for a specific period of time.

Generally, the bond issuer is expected to return the principal at maturity with an agreed upon interest to the bondholder, which is payable at fixed intervals.

The par value of a bond is its face value and it comprises of its total dollar amount as well as its maturity value. Also, the par value of a bond gives the basis on which periodic interest is paid. Thus, a bond is issued at par value when the market rate of interest is the same as the contract rate of interest. This simply means that, a bond would be issued at par (face) value when the bond's stated rated is significantly equal to the effective or market interest rate on the specific date it was issued.

In Economics, bonds could either be issued at discount or premium.

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