Question

Not found Q 50 Done The Lopez-Portillo Company has $10.2 milion in assets, 80 percent financed by debt and 20 percent financed by common stock. The interest rate on the debt is 13 percent and the par value of the stock is $10 per share. President Lopez-Portillo is considering two financing plans for an expansion to $16 million in assets. Under Plan A, the debt-to-total-assets ratio will be maintained, but new debt will cost a whopping 15 percent! Under Plan B, only new common stock at $10 per share will be issued. The tax rate is 35 a. If EBIT is 14 percent on total assets, compute earnings per share (EPS) before the expansion and under the two alternatives. (Round your answers to 2 decimal places.) Earnings per Share Current Plan A Plan B b. What is the degree of financial leverage under each of the three plans? (Round your answers to 2 decimal places.) Degree of Financial Leverage Plan A Plan B FS -F6 2 4
With explanations please

Answer 1

a.
	Current	Plan A	Plan B
EBIT	1428000	2240000	2240000
(14%*TOTAL ASSETS)	10.2*1000000*14%	16*1000000*14%	16*1000000*14%
Less:Interest	1060800	1756800	1060800
	(10.2*1000000)*80%*13%	(10.2*1000000)*80%*13%+(80%*5800000*15%)	(10.2*1000000)*80%*13%
EBT	367200	483200	1179200
Less:Taxes@35%	128520	169120	412720
EAT	238680	314080	766480
Common shares	204000	320000	784000
	(20%*10.2*1000000)/10	((20%*10.2*1000000)+(20%*5800000))/10	(20%*10.2*1000000)/10+(5800000/10)
EPS	$                                                                         1.17	$                                                                                 0.98	$                                                                      0.98
B.
DFL=EBIT/(EBIT-Initerest)
	Current	Plan A	Plan B
EBIT(a)	1428000	2240000	2240000
EBIT	1428000	2240000	2240000
Less:interest	1060800	1756800	1060800
total(b)	367200	483200	1179200
DFL(a/b)	3.89	4.64	1.90
c.	Plan A	Plan B
EAT	314080	766480
Common shares	262000	494000
	(20%*10.2*1000000)/10+(20%*5800000)/20	(20%*10.2*1000000)/10+(5800000/20)
EPS	$                                                                         1.20	$                                                                                 1.55