higher or lower will the firm's expected EPS be if it uses some debt rather than only equity, i.e., what is EPSL EPSU? 0% Debt, U 60% Debt, L Oper. income (EBIT) $810,000 $810,000 Required investment $

Financial Management: Theory & Practice
16th Edition
ISBN:9781337909730
Author:Brigham
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Chapter21: Dynamic Capital Structures And Corporate Valuation
Section: Chapter Questions
Problem 4MC: David Lyons, CEO of Lyons Solar Technologies, is concerned about his firms level of debt financing....
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You work for the CEO of a new company that plans to manufacture and sell a new type of laptop
computer. The issue now is how to finance the company, with only equity or with a mix of debt and
equity. Expected operating income is $810,000. Other data for the firm are shown below. How much
higher or lower will the firm's expected EPS be if it uses some debt rather than only equity, i. e., what is
EPSL - EPSU? 0% Debt, U 60% Debt, L Oper. income (EBIT) $810,000 $810,000 Required investment $
2,500,000 $2,500,000 % Debt 0.0% 60.0% $ of Debt $0.00 $1,500,000 $ of Common equity $2,500,000 $
1,000,000 Shares issued, $10/share 250,000 100, 000 Interest rate NA 10.00% Tax rate 25% 25% a. $0.75 b. $
2.52 c. $3.36 d. $4.10 e. $2.90
Transcribed Image Text:You work for the CEO of a new company that plans to manufacture and sell a new type of laptop computer. The issue now is how to finance the company, with only equity or with a mix of debt and equity. Expected operating income is $810,000. Other data for the firm are shown below. How much higher or lower will the firm's expected EPS be if it uses some debt rather than only equity, i. e., what is EPSL - EPSU? 0% Debt, U 60% Debt, L Oper. income (EBIT) $810,000 $810,000 Required investment $ 2,500,000 $2,500,000 % Debt 0.0% 60.0% $ of Debt $0.00 $1,500,000 $ of Common equity $2,500,000 $ 1,000,000 Shares issued, $10/share 250,000 100, 000 Interest rate NA 10.00% Tax rate 25% 25% a. $0.75 b. $ 2.52 c. $3.36 d. $4.10 e. $2.90
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