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The Lopez-Portillo Company has $12.3 million in assets, 70 percent financed by debt and 30 percent...

The Lopez-Portillo Company has $12.3 million in assets, 70 percent financed by debt and 30 percent financed by common stock. The interest rate on the debt is 8 percent and the par value of the stock is $10 per share. President Lopez-Portillo is considering two financing plans for an expansion to $26.5 million in assets.

Under Plan A, the debt-to-total-assets ratio will be maintained, but new debt will cost a whopping 11 percent! Under Plan B, only new common stock at $10 per share will be issued. The tax rate is 35 percent.

a. If EBIT is 9 percent on total assets, compute earnings per share (EPS) before the expansion and under the two alternatives. (Round your answers to 2 decimal places.)

Current 0.74

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.)
  

Current 2.65

Plan A

Plan B

c. If stock could be sold at $20 per share due to increased expectations for the firm’s sales and earnings, what impact would this have on earnings per share for the two expansion alternatives? Compute earnings per share for each. (Round your answers to 2 decimal places.)
  

Plan A

Plan B

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Home nert Page Layout Formulas Data Review View dd-Ins Cut 11.A. A.--- 9- ずWrap Text Σ AutoSum General ey Format Painter B 1 U. ㄧ˙ タ.Δ. -=- i 便困Merge & Center. $,%, ,,oan conditional Format Cell Insert Delete Format 2 ClearFe Select Edting Clipboard Alignment Number DJ15 | DO | DP DU DV DW DX 2 TOTAL ASSETS EXISTING PLAN 30% EQUITY OF ASSETS 7096 DEBT OF ASSETS 12300000 4 EXISTING PLAN A PLAN B NO OF SHARES EBIT 3690000 (3690000/10 -369000) 8610000 1107000 2385000 2385000 INTEREST 8.00% 688800 1782200 688800 418200 602800 1696200 35% 146370 210980 593670 271830 3918201102530 6 EBT TAX NET INCOME PLAN A EQUITY DEBT TOTAL ASSETS 8 NO OF SHARES 7950000 (7950000/10-795000) 10 1.1 12 13 a 14 15 16 17 18 19 | 20 18550000 26500000 NO OF SHARES 369000 7950001789000 EPS 0.74 0.62 PLAN B EQUITY DEBT TOTAL ASSETS 0,49 NO OF SHARES NET INCOME/ NO OF SHARES 17890000 (17890000/10-1789000) 8610000 26500000 NOTE: INTEREST EXISTING 8610000X 8% PLAN A 8610000 X 8% + (185500008610000) X1196 PLAN B 8610000X 8% rtfolio retrement futures margn PLF, ANNUITY ACC _C NE[ BOND HPR REALISED YIELD NPV ROE st d cost ng EPS , HOONON, EOREATERIBUYA K ShsHome nert Page Layout Formulas Data Review View dd-Ins s Cut ta copy ▼ E AutoSum ー E ゴWrap Text в 1 프· ー· 鱼, Δ. : rーー 遑锂函Merge & Center. $, % , 弼,8 Conditional Format eCell Insert Delete Formsat Paste Sort &Find & Format Painter Formatting as Table Styles2 Clear Clipboard Font Alignment Number Cells Edting DM31 DI DJ DK DL DM DN DO DP DQ DR DS DT DU DV DW DX DY 23 24 25 26 27 28 29 30 31 32 CURRENT PLAN PLAN A PLAN B EPS 0.74 0.49 0.62 DEGREE OF FINANCIAL LEVERAGE EBIT/EBT CURRENT PLAN PLAN A PLAN B 2.65 DL5/DL7 3.96 DM5/DM7 1.41 DN5/DN7 34 35 36 37 38 39 40 retirementfutures FV. ANNUITY ACC CVP KE BOND HPR REALISED YIELD NPV ROE std costing EPS%, ECONOMY, BEFORE AFTER BUYBACK Shel 02:29Home nert Page Layout Formulas Data Review View dd-Ins Cut copy ▼ Format Painter E AutoSum Calibri ー E ゴWrap Text General conditional Format hal ins. Delete Format Eutosumh A в 1 프· ー· 鱼, Δ. : rーー 逻锂函Merge & Center. $, % , 弼,8 Conditional Format eCell Insert Delete Formsat Formatz Paste Formattng as Table styies 2 ClearFe Select Editing Clipboard Font Alignment Number er Styles DN35 DI D DK DL DM DN DO DP DQ DR DS DT DU DV DW DX DY 35 36 37 38 EBIT 39 INTEREST 8.00% 688800 1782200 688800 40 41 42 TOTAL ASSETS EXISTING PLAN 30 % EQUITY OF ASSETS 7096 DEBT OF ASSETS 12300000 NO OF SHARES EXISTING PLAN A PLAN B 1107000 2385000 2385000 3690000 (3690000/10 369000) 8610000 EBT TAX NET INCOME 418200 602800 1696200 35% 146370 210980 593670 271830 3918201102530 PLAN A EQUITY NO OF SHARES 30% 7950000 EXISTING SHARES 369000 ADDITIONAL SHARES-(7950000- 3690000)/20 ADDITIONAL SHARES 213000 TOTAL SHARES = 369000 + 213000 = 582000 NO OF SHARES 369000 582000 1079000 DEBT TOTAL ASSETS 70% 18550000 26500000 46 c EPS 47 NET INCOME/ NO OF SHARES 0.74 0.67 1.02 PLAN B EQUITY DEBT TOTAL ASSETS NO OF SHARES 49 17890000 EXISTING SHARES 369000 8610000 ADDITIONAL SHARES (17890000 26500000 ADDITIONAL SHARES= 710000 EPS 3690000)/20 0.67 1.02 511 PLAN A PLAN B TOTAL SHARES = 369000 + 710000-1079000 53 rtfolio -retirement futures margn , pv, R, ANNUITY AC.CV KE BOND HPRREALISED YIELD NPV ROE- Std 0 ting EPS ECONOMY İOREATER . B MA K Shia ,

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