Unibloc Inc. currently sells 3.2 million construction set toys per year at a price of $39.95...

Unibloc Inc. currently sells 3.2 million construction set toys per year at a price of $39.95 each. The company has $13.9 million in debt with an average coupon rate of 9% and 15 million shares outstanding, which trade at $59.81. The company's average tax rate is 29%.

The company plans to modernize its production process. The new machines will cost $8.3 million and will reduce the variable cost per unit to $29.96, while increasing fixed costs, including depreciation, to $18.4 million. Sales will be unaffected. They company could raise $8.3 million by borrowing at an interest rate of 9% or by selling more shares at the current stock price.

a) What would be EPS if the investment is financed with debt?

b) What would be EPS if the investment is financed with equity?

c) What number of units sold will lead to the same EPS with debt financing and equity financing (in million)?

Expert Solution

jeff jeffy answered 2 years ago

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