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Triss [41]
3 years ago
5

Kyle Corporation is comparing two different capital structures, an all-equity plan (Plan I) and a levered plan (Plan II). Under

Plan I, the company would have 715,000 shares of stock outstanding. Under Plan II, there would be 465,000 shares of stock outstanding and $6.75 million in debt outstanding. The interest rate on the debt is 7 percent, and there are no taxes.
a. Assume that EBIT is $1.6 million. Compute the EPS for both Plan I and Plan II.
b. Assume that EBIT is $3.1 million. Compute the EPS for both Plan I and Plan II.
c. What is the break-even EBIT?
Business
1 answer:
kozerog [31]3 years ago
7 0

Answer:

EPS = (Net income - Dividends) / Average number of share

a. <u>Plan 1</u>

Number of share = 715,000

EPS = $1,600,000/715,000

EPS = 2.23 (EBIT = Net Income as Interest and tax are 0)

<u>Plan 2</u>

Net income = EBIT = $1.6 million = $1,600,000

Interest = 0.07*$6,750,000 = $472,500

EBT = $1,600,000 - $472,500 = $1,127,500

Tax = 0

Net Income = 1,127,500 (1)

Number of share = 465,000

EPS = $1,127,500/465000

EPS = 2.42 (Net Income from 1)

b. <u>Plan 1</u>

EPS = $3,100,000/715000 = $4.33

<u>Plan 2</u>

When EBIT = $3,100,000

Interest = 0.07*$6,750,000 = $472,500

Net Income = $3,100,000 - $472,500 = $2,627,500

EPS = $2,627,500/465,000

EPS = 5.65 (From 2)

c. Plan 1 EBIT = Plan 2 EBIT to calculate break-even EBIT

EBIT/715,000 = (EBIT - 0.07*$6,750,000)/465,000

EBIT = $1,351,350

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Lelechka [254]

Answer:

Cost of goods sold is $196

Explanation:

Using FIFO inventory sold are valued at the price of the most earliest stock in inventory.

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costs of goods sold=($11*16)+($10*2)

                                =$176+$20=$196

The costs of goods sold would be $196 if FIFO method of inventory valuation is used

6 0
3 years ago
Akwamba made this statement ‘organisations cannot be successful if managers fail to pay attention to the forces in the external
WARRIOR [948]

Answer:

Yes, I agree.

Find explanation below.

Explanation:

The external environment of a business simply refers to the factors found outside the business which can have a profound effect on it. There are basically two types of external environments, namely;

1. The directly interactive which has a direct impact on the business. Examples include, business owners, the customers, contractors, and competitors.  

2. Indirectly interactive whose impact on the business is not immediate. Examples include, the political , socio-cultural, economic influences among others.

Practical Examples:

1. Customers play a crucial role to the running of businesses. Managers must take care to listen to the concerns of the customers and attend to their needs urgently. For example, if a customer complains about his dissatisfaction with a style of service, managers should endeavor to address the concern to avoid losing the customer.

2.Political: Government rules and regulations have an impact on businesses because, not adhering to them could lead to sanctions and even closure of the business. Managers must ensure that they heed to and comply with governmental instructions, such as tax payment.

3 0
2 years ago
During the year, Belyk Paving Co. had sales of $2,275,000. Cost of goods sold, administrative and selling expenses, and deprecia
ycow [4]

Answer:

a. -$210,000

b. $455,000

Explanation:

a. Company's net income

Sales. 2,275,000

Less:

Cost of goods sold

1,285,000

Administrative and selling expenses

535,000

Depreciation expense

420,000

EBIT

35,000

Less interest

245,000

Taxable income

-$210,000

Taxes 21%

Nil

Net income

-$210,000

b. The operating cash flow for the year

OCF = EBIT + depreciation - taxes

OCF = 35,000 + 420,000 - 0

OCF = $455,000

c. Net income was negative due to the deductibility of interest expense and depreciation.

The actual operating cash flow was positive due to the fact that depreciation is a non cash expense, and also interest is a financing and not an operating expense.

5 0
3 years ago
The Jameson Company just paid a dividend of $0.75 per share, and that dividend is expected to grow at a constant rate of 5.50% p
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Answer:

Current price of the stock of Jameson company is $18.62. Therefore, the correct option is A

Explanation:

The formula of required rate of return is:

Required rate of return = Risk free rate + Beta × Market risk premium

= 4% + 1.15 × 5%

= 4%  5.75%

= 9.75%

Computation of current stock price is:

Current stock price = Expected dividend per share / (Required rate of return - Growth in dividend)

= (0.75 + [5.50% × 0.75] ) / (0.0975 - 0.055)

= 0.79125 / 0.0425

= $18.62

5 0
3 years ago
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