Question
In: Finance
1) HSB Co. manufactures construction materials and has decided to expand operations. The new operation...
1) HSB Co.
manufactures construction materials and has decided to expand
operations.
The new operation is expected to increase
EBIT from the current level of $750 000
to $1 million per annum. HSB Co. has a
capital structure that utilizes bonds,
ordinary equity and preference shares. The
$500 000 of issued bonds pay 7% per
annum. Preference shares pay an annual
fixed dividend of $75 000. The company
has 1 000 000 ordinary shares that are
trading at $5 per share. Corporate tax rate is
18.5%.
a) HSB Co needs to
raise $800 000 to fund the expansion. Assuming the company
can issue new shares at the current
market price, what is the impact on EPS if new
shares are issued to fund the
expansion?
b) If new debt can
be raised at 9% interest rate, what is the impact on EPS of
using
debt rather than a new equity
issue?
c) Calculate the EPS indifference point of New Equity plan and New Debt Plan.
Solutions
jeff jeffy answered 1 year agoRelated Solutions
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