Question
In: Finance
The Lopez-Portillo Company has $10.1 million in assets, 90 percent financed by debt and 10 percent...
The Lopez-Portillo Company has $10.1 million in assets, 90 percent financed by debt and 10 percent financed by common stock. The interest rate on the debt is 14 percent and the par value of the stock is $10 per share. President Lopez-Portillo is considering two financing plans for an expansion to $15.5 million in assets.
Under Plan A, the debt-to-total-assets ratio will be maintained,
but new debt will cost a whopping 16 percent! Under Plan B, only
new common stock at $10 per share will be issued. The tax rate is
30 percent.
a. If EBIT is 16 percent on total assets,
compute earnings per share (EPS) before the expansion and under the
two alternatives. (Round your answers to 2 decimal
places.)
b. What is the degree of financial leverage
under each of the three plans? (Round your answers to 2
decimal places.)
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.)
Solutions
jeff jeffy answered 1 year agoRelated Solutions
The Lopez-Portillo Company has $12.1 million in assets, 90 percent financed by debt and 10 percent...
The Lopez-Portillo Company has $12.1 million in assets, 90
percent financed by debt and 10 percent financed by common stock.
The interest rate on the debt is 11 percent and the par value of
the stock is $10 per share. President Lopez-Portillo is considering
two financing plans for an expansion to $25.5 million in assets.
Under Plan A, the debt-to-total-assets ratio will be maintained,
but new debt will cost a whopping 13 percent! Under Plan B, only
new common stock...
The Lopez-Portillo Company has $10.3 million in assets, 70 percent financed by debt and 30 percent...
The Lopez-Portillo Company has $10.3 million in assets, 70
percent financed by debt and 30 percent financed by common stock.
The interest rate on the debt is 12 percent and the par value of
the stock is $10 per share. President Lopez-Portillo is considering
two financing plans for an expansion to $16.5 million in
assets.
Under Plan A, the debt-to-total-assets ratio will be maintained,
but new debt will cost a whopping 14 percent! Under Plan B, only
new common stock...
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...
The Lopez-Portillo Company has $11.8 million in assets, 80 percent financed by debt and 20 percent...
The Lopez-Portillo Company has $11.8 million in assets, 80
percent financed by debt and 20 percent financed by common stock.
The interest rate on the debt is 14 percent and the par value of
the stock is $10 per share. President Lopez-Portillo is considering
two financing plans for an expansion to $24 million in assets.
Under Plan A, the debt-to-total-assets ratio will be maintained,
but new debt will cost a whopping 17 percent! Under Plan B, only
new common stock...
The Lopez-Portillo Company has $12.2 million in assets, 80 percent financed by debt and 20 percent...
The Lopez-Portillo Company has $12.2 million in assets, 80
percent financed by debt and 20 percent financed by common stock.
The interest rate on the debt is 9 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 million in assets.
Under Plan A, the debt-to-total-assets ratio will be maintained,
but new debt will cost a whopping 12 percent! Under Plan B, only
new common stock...
NoNuns Cos. has a 25 percent tax rate and has $302.40 million in assets, currently financed...
NoNuns Cos. has a 25 percent tax rate and has $302.40 million in
assets, currently financed entirely with equity. Equity is worth
$30 per share, and book value of equity is equal to market value of
equity. Also, let’s assume that the firm’s expected values for EBIT
depend upon which state of the economy occurs this year, with the
possible values of EBIT and their associated probabilities as shown
below:
State
Recession
Average
Boom
Probability of state
0.20
0.55
0.25...
NoNuns Cos. has a 25 percent tax rate and has $302.40 million in assets, currently financed...
NoNuns Cos. has a 25 percent tax rate and has $302.40 million in
assets, currently financed entirely with equity. Equity is worth
$30 per share, and book value of equity is equal to market value of
equity. Also, let’s assume that the firm’s expected values for EBIT
depend upon which state of the economy occurs this year, with the
possible values of EBIT and their associated probabilities as shown
below:
State
Recession
Average
Boom
Probability of state
0.20
0.55
0.25...
GTB, Inc. has a 21 percent tax rate and has $100 million in assets, currently financed...
GTB, Inc. has a 21 percent tax rate and has $100 million in
assets, currently financed entirely with equity. Equity is worth $7
per share, and book value of equity is equal to market value of
equity. Also, let’s assume that the firm’s expected values for EBIT
depend upon which state of the economy occurs this year, with the
possible values of EBIT and their associated probabilities as shown
below:
State
Pessimistic
Optimistic
Probability of
state
0.45
0.55
Expected EBIT...
Dickinson Company has $12,080,000 million in assets. Currently half of these assets are financed with long-term...
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half of these assets are financed with long-term debt at 10.4
percent and half with common stock having a par value of $8. Ms.
Smith, Vice President of Finance, wishes to analyze two refinancing
plans, one with more debt (D) and one with more equity (E). The
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Dickinson Company has $11,920,000 million in assets. Currently half of these assets are financed with long-term...
Dickinson Company has $11,920,000 million in assets. Currently
half of these assets are financed with long-term debt at 9.6
percent and half with common stock having a par value of $8. Ms.
Smith, Vice President of Finance, wishes to analyze two refinancing
plans, one with more debt (D) and one with more equity (E). The
company earns a return on assets before interest and taxes of 9.6
percent. The tax rate is 35 percent. Tax loss carryover provisions
apply, so...
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