Question

GreenThumb Greenhouses Inc., currently an un-levered firm, is planning a major expansion program. GreenThumb has proposed the following options to raise funds for the expansion. Plan A is an all equity plan. Under this plan, 2,000,000 common shares will be sold to net the company $2.50 per share. Plan B calls for a debt issue of 20-year maturity bonds as well as some additional new equity at the same price per share as in plan A. The debt issue will be for $2,000,000 and carry a 9 percent interest rate. GreenThumb’s tax rate is 40% and the company currently has 5,000,000 shares of common stock outstanding.

a) How much capital must be raised for this project? (1 mark)
b) Calculate the indifference EBIT (EBIT*) associated with these two plans. (6 marks)
c) Calculate the EPS at the indifference EBIT calculated in part b. (2 marks)
d) If the expected EBIT is $800,000, which plan should be chosen? Explain why? (2 marks).
e) The company has decided to change Plan A from issuing 2,000,000 common shares to issuing all new preferred shares with a dividend of 3%. Plan B will remain the same. What will be the new indifference EBIT (EBIT*)?

Thanks in advance! please show steps not just excel

Answer 1

Thursday (a) ter proient A the totul ceepitel mest be reeised is 2000000 depreity Shares all the sute of $2,50 per share. Thent means toteed of $500000o. - for project B the toteed lepitud must be raised is $2000000 dept and 5066ooo equity shaive of $2,50 per shee that is total of $ 125000000 + $2000oor = Bluso ooo TEBIT -o (1-0.40 - EBIT - 180000 (1.0.4 2000000 S00001 EB IT (0-60 ) - (EBIT - 180000 (0.60) 20006oo SOO0000 COX = 0.60 GBIT 2000000 0.60 GB IT - 108000 STO60600 368 U = 1.2 GBIT + 216000 0.8 EB IT = 216000 oor TEBIT = $120000 7

Friday . (e) Project A Project B EBIT L$ 120000 $ 120000 Tot 6000 $ 180000 EBT $ 120000 $ 60000 - rex 4x $ 48006 - $ 24000 PAT & 72000 wol-$ 36000 10 (1900 b 3 12 EPS = Profit attested i Ces not Calalet ooooo in Mo. of shares the Eps in plan $ 72003 because there is 20000oJ loss. CORE .036 o a (0) Expected EBIT $800000 GOOD Plem A EBIT 800000 - Plan B S00000 1180000 6Q000D 248000 370000 EBT 8000os & tux 4o7. 300006 PA1 OubO OD IPS = 480000 OEPS =11 372000 2000000 SOO0002 AC000 - 0.24 - 0.0764 For expected EBIT of $ 800000 plan must be choose be caure plan A has better Eps than plan B.

Saturday TEBIT - 0) (1.0.40) - 128000 = EBIT - 180000 €1-0.40 1000000 SOO0000 0.60 EBIT - 150000 - (EBIT-180000 0:60 abboo 5000000 0.60 EB T-150000 0.60 EBIT - 10800D 2000000 5000000 3 EBIT - 750000 - 1.2 EBIT -216000 12 1.8 EB IT - 834000 EBIT - 534000 EBIT = 296667