This information will be used for two questions! Sand Key Development Company has a capital structure...

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Your firm is selling a 3-year old machine that has a 5-year class life. The machine originally cost $580,000 and required no

You currently own 100 shares of stock in Beverly Brothers Inc. The stock currently trades at $120 a share. The company is con

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Answer 1

Answer #1

1]	Number of new shares to be issued = 15000000/75 =	200000
	Total number of shares if equity is issued = 500000+200000 =	700000
	EPS under Equity option =(EBIT-2000000)*0.66/700000
	EPS under Debt option =(EBIT-3350000)*0.66/500000
	[Total interest expense under Debt option would be 2000000010%+150000009%]
	For EPS to be equal under both options, the following
	equality is to be satisfied:
	(EBIT-2000000)0.66/700000 = (EBIT-3350000)0.66/500000
	where EBIT is the indifference level operating income.
	Solving for EBIT:
	5(EBIT-2000000) = 7(EBIT-3350000)
	2EBIT = 73350000-5*2000000 =	$ 13,450,000
	EBIT = 13450000/2 =	$ 6,725,000
2]	If operating income is $7.5 million, the debt option
	should be used, as the expected EBIT is higher than
	the indifference level of EBIT.
	When expected EBIT is higher than the indifference
	level of EBIT, the advantage of financial leverage will
	acccrue.
	Answer: The debt financing option
3]	Book value of the machine = 580000*(11.52%+11.52%+5.76%) =	$ 167,040
	Tax on gain on sale = (180000-167040)*34% =	$ 4,406
	Cash flow effect from selling the machine = 167040-4406 =	$ 162,634
	All the given options are wrong. Correct answer is: $162,634
4]	*You will have 200 shares of stock, and the stock will trade
	at $60 a share.

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