Question

Firm A wants to finance $5 million to support its new strategic plan. The firm expects that it will be able to generate $2 million in EBIT in the first year of implementing the strategy. The current stock price of Firm A is $10 and it has 1 million shares outstanding. The firm expects that it will be able to borrow money at 7% annual interest. Tax rate is 30%.

Firm A considers raising the entire amount by issuing new shares.

• How many new shares need to be issued? (4 points)
• What is the level of EBT if the firm uses this financing method? (4 points)
• How much interest does the firm need to pay in the first year? (3 points)
• What is the level of net income (EAT) if the firm uses this financing method? (3 points)
• What is the resulting EPS if the firm uses this financing method? (4 points)
• Firm A also wants to consider combining debt and equity financing methods. If the firm goes for 20% debt and 80% equity to raise the target amount, what is the resulting EPS?

Answer 1

Finance required=	$ 5 million
EBIT=	$ 2 million
Current Stock Price=	$ 10
Shares Oustanding=	1 million
Borrowing Rate=	7% per annum
Tax Rate=	30%
Firm A consider raising the entire amount by issuing new shares
a) How many new shares need to be issued ?
Ans:
Finance required=	$ 5 million
Current Stock Price=	$ 10 per share
New Shares to be issued= Finance required/ current stock price per share
New Shares to be issued= $ 5 million/ $ 10
New Shares to be issued= 0.5 million
b) What is the level of EBT if the firm uses this financing method?
EBT=	EBIT- Interest
As financing made through issue of shares,thus there is no debt and no interest.
EBT=	$ 2 million- 0
EBT=	$ 2 million
c) How much interest does the firm need to pay in the first year?
As financing made through issue of shares,thus there is no debt and no interest.
Interest= $ 0
d) What is the level of net income (EAT) if the firm uses this financing method?
EAT=	EBIT-Interest - Tax
EAT=	$ 2 million -$ 0 - $ 2 million x 30%
EAT=	$ 2 million -$ 0 - $ 0.6 million
EAT=	$ 1.4 million
e) What is the resulting EPS if the firm uses this financing method?
EPS=	Earning available to equity shareholder/ Total number of Outstanding Shares
EPS=	$ 1.4 million/ (1 million+ 0.5 million)
EPS=	$ 1.4 million/ (1.5 million)
EPS=	$0.93
f) Firm A also wants to consider combining debt and equity financing methods.
If the firm goes for 20% debt and 80% equity to raise the target amount, what is the resulting EPS?
Total Finance required= $ 5 million
Debt= $ 5 X 20%= $ 1 million
Equity= $ 5 X 800%= $ 4 million
New Shares to be issued= Finance required/ current stock price per share
New Shares to be issued= $ 4 million/ $ 10
New Shares to be issued= 0.4 million
Total Shares outstanding= 1 million+ 0.4 million
Total Shares outstanding= 1.4 million
Interest= $ 1 miilion X 7%= $ 0.07 million
EBT = EBIT- Interest
EBT = $ 2 million- $ 0.07 million
EBT = $ 1.93 mill jeff jeffy Next > < Previous Related Solutions Marketing plan is for New vegan restaurant Marketing (Topic 5) Consider if your strategic plan is... Marketing plan is for New vegan restaurant Marketing (Topic 5) Consider if your strategic plan is a market entry plan (entrepreneurial), a market expansion plan for an existing organization, or a mergers and acquisitions plan. Deciding who the target market is and determining their demographics, behaviors, motivation, needs, and goals is essential because the target market drives the marketing plan. This is typically done through studying research and data related to how potential customers are willing to invest their time... An Accra based micro finance company that is developing a 5 year -strategic human plan (2020-2025)... 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