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.

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jeff jeffy answered 1 year ago

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