Business, 08.11.2019 00:31, amberlynnwallac7808

North side, inc. has no debt outstanding and a total market value of $168,000. earnings before interest and taxes, ebit, are projected to be $18,000 if economic conditions are normal. if there is strong expansion in the economy, then ebit will be $21,960 . the company is considering a $50,000 debt issue with an interest rate of 7.4 percent. the proceeds will be used to repurchase shares of stock. there are currently 5,000 shares outstanding and the tax rate is 21 percent. what is the eps for each capital structure under each scenario? if we ignore taxes, what is the break-even ebit?

Answers: 1

Show answers

Answers

answered: henrygrubb554

The Breakeven EBIT is 12432.

Explanation:

NORMAL STRONG EXPANSION

EBIT 18000 21960

Interest (3700) (3700)[50000*7.4%]

EBT 14300 18260

Taxes (3003)[14300*0.21] (3834.6)[18260*.21]

Net Income 11297 14425.4

Number of shares outstanding3511.90 3511.90

EPS 11297/3511.9 14425.4/3511.90

= $ 3.22 per share = $ 4.11 per share

Working:

Share price = Total market value /number of shares outstanding

= 168000/5000

= $ 33.6 per share

Number of shares repurchased from amount received from debt issue = Total debt /current share price per share

= 50000/33.6

= 1488.10

shares after repurchase = 5000 - 1488.10

= 3511.90

b)There are no taxes.

Alternative I ,Earning per share = EBIT /number of shares outstanding [Before repurchase]

Alternative II ,earning per share = [EBIT- interest ]/Number of shares outstanding after repurchase.

At breakeven Earning per share under both alternative are equal.

EBIT /5000 = [EBIT-3700]/3511.90

3511.90 *EBIT /5000 = EBIT - 3700

0.70238 EBIT = EBIT -3700

EBIT - 0.70238 EBIT = 3700

0.29762 EBIT = 3700

EBIT = 3700/0.29762

= 12431.96

Therefore, The Breakeven EBIT is 12432.

answered: Guest

How is this a question and how u need an answer for this

answered: Guest

hi there,

do u need ? ?

thx

Other questions on the subject: Business

Business, 22.06.2019 18:30, lebronbangs8930

> > objectives define federalism and explain why the framers adopted a federal system instead of a unitary system. categorize powers delegated to and denied to the national government, and powers reserved for and denied to the states, and the difference between exclusive and concurrent powers.

Answers: 1

continue

Business, 22.06.2019 19:00, karmaxnagisa20

By 2020, automobile market analysts expect that the demand for electric autos will increase as buyers become more familiar with the technology. however, the costs of producing electric autos may increase because of higher costs for inputs (e. g., rare earth elements), or they may decrease as the manufacturers learn better assembly methods (i. e., learning by doing). what is the expected impact of these changes on the equilibrium price and quantity for electric autos?

Answers: 1

continue

Business, 22.06.2019 22:00, Kira4585

Retail industry fundamentals credential exam, part 1 all answers

Answers: 3

continue

Business, 22.06.2019 22:40, laceysmith2i023

Suppose your firm is considering investing in a project with the cash flows shown as follows, that the required rate of return on projects of this risk class is 10 percent, and that the maximum allowable payback and discounted payback statistics for the project are three and a half and four and a half years, respectively. use the irr decision to evaluate this project; should it be accepted or rejected

Answers: 3

continue

Do you know the correct answer?

North side, inc. has no debt outstanding and a total market value of $168,000. earnings before inter...