# Calculating Ebt-Eps Analysis

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Calculating Ebt-Eps Analysis
1. Equipment purchase
Firm’s capital structure
Debt \$3,500,000
Preferred stock \$2,400,000
Common stock \$6,300,000
Company will sell 10-year bond at 6.5% per year at a market price of \$1,028
Preferred stock paying \$2.02 dividend can be sold for \$25.07
Common stock is selling at \$54.44 per share and the firm pay dividend of \$2.97 last year.
Dividend is expected to continue growing at a rate of 5.3% per year into the indefinite future.
If the firm’s tax rate is 30% what discount rate should be used to evaluate equipment price?
After tax cost of debt -= 6.117% x (1- 30%) = (three decimal places)
Cost of common equity = \$ \$2.97 x(1+5.3%)/\$55.44 + 5.3% =
Prefered stock holder’s rate of return
\$2.02/ \$25.07 = (three decimal places)

Weights After tax cost of financing product
Debt
Preferred Stock
Common stock
WACC =

2. EBIT-EPS analysis for two plans proposed
Plan 1. An all-common equity structure in which \$2.4 million will be raised selling \$90,000 shares of common stock.
Plan 2 involve issuing \$1.3 million in long-term bonds with effect interest rate of 11.9% plus \$1.1 million will be raised selling \$45,000 shares of common stock. The debt funds have no fixed maturity rate in that this amount of financial leverage is considered a permanent part of the firm’s capital structure.
The firm’s tax rate is 35%
A) find the EBIT indifference associated with both plans
B) Prepare a Pro forma income statement for EBIT level solved in plan 1 that shows EPS will be the same regardless of which plan will be chosen

!. EBIT indifference

EBIT stock plan EBIT bond plan

(EBIT - \$0)x (1-36%)/\$90,000 = (EBIT- \$ Interest expense ) x (1- 36%)/ \$45,000
EBIIT

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