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5. Margaret Finance is the CFO of Dividends Rus Corp. She is trying to decide whether...

5. Margaret Finance is the CFO of Dividends Rus Corp. She is trying to decide whether she should increase the dividend payment from $ 1.25 per share to $ 1.50 per share instead of using that money for repaying $ 2 m of long-term debt that would take the debt balance to $ 4 million. The Dividend Rus Corp is paying an 8% coupon rate and the current bond yield is 10%. The debt was issued at par.
The company latest after-tax Earnings is $ 32 m, up from after-tax Earnings of $ 24 m the year before. The Industry-average EPS is $ 3.25. The Net Income Before Taxes was $ 40 million. The company pays a flat tax rate (marginal tax rate = average tax rate).

Required:
a. What was the change in EPS (dollar and percentage)?
b. How compare Dividends Rus Corp EPS to the industry average EPS?

i. Why would this be important to a potential investor?
ii. Should Margaret increase dividends or repay $ 2 million of debt? Explain thoroughly

Solutions

Expert Solution

SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

jeff jeffy answered 1 year ago
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