Question

In: Finance

your firm is considering two financing plans. The key information follows: use a 40% tax rate...

your firm is considering two financing plans. The key information follows: use a 40% tax rate

Source of funds Plan A Plan B
Long term Dent $500 @ 6% $2,500 @ 10%
Preferred Stock 50 shares, $2 dividend per share 10 shares, $2 dividend per share
Common Stock 60 shares 15 shares

Draw the Earning Per Share and Earning Before Interest Tax line for each plan on the same set axes. Over what range of Earnings before income tax would you prefer Plan A?

Show in excel if possible

Solutions

Expert Solution

Please refer to below spreadsheet for calculation and answer. Cell reference also provided.

Cell reference -

With above EBIT-EPS Plot, Plan-A would be preferred if EBIT is below $312 because EPS of Plan-B is higher when EBIT > $312.

Hope this will help, please do comment if you need any further explanation. Your feedback would be appreciated.

jeff jeffy answered 1 year ago
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