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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 $800,000. 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? Oper. income (EBIT) Required investment % Debt $ of Debt $ of Common equity Shares issued, $10/share. Interest rate Tax rate 0% Debt, U $800,000 $2,500,000 0.0% $0.00 $2,500,000 250,000 ΝΑ 25% 60% Debt, L $800,000 $2,500,000 60.0% $1,500,000 $1,000,000 100,000 10.00% 25%

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 $800,000. 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? Oper. income (EBIT) Required investment % Debt $ of Debt $ of Common equity Shares issued, $10/share. Interest rate Tax rate 0% Debt, U $800,000 $2,500,000 0.0% $0.00 $2,500,000 250,000 ΝΑ 25% 60% Debt, L $800,000 $2,500,000 60.0% $1,500,000 $1,000,000 100,000 10.00% 25%

Principles of Accounting Volume 2
Principles of Accounting Volume 2
19th Edition
ISBN:9781947172609
Author:OpenStax
Publisher:OpenStax
Chapter9: Responsibility Accounting And Decentralization
Section: Chapter Questions
Problem 3PB: The income statement comparison for Rush Delivery Company shows the income statement for the current...
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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 $800,000. 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? Oper. income (EBIT) Required investment % Debt $ of Debt $ of Common equity Shares issued, $10/share Interest rate Tax rate a. $2.85 O b. $0.75 O c. $4.05 O d. $3.30 O e. $2.48 0% Debt, U $800,000 $2,500,000 0.0% $0.00 $2,500,000 250,000 ΝΑ 25% 60% Debt, L $800,000 $2,500,000 60.0% $1,500,000 $1,000,000 100,000 10.00% 25%
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 $800,000. 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? Oper. income (EBIT) Required investment % Debt $ of Debt $ of Common equity Shares issued, $10/share Interest rate Tax rate a. $2.85 O b. $0.75 O c. $4.05 O d. $3.30 O e. $2.48 0% Debt, U $800,000 $2,500,000 0.0% $0.00 $2,500,000 250,000 ΝΑ 25% 60% Debt, L $800,000 $2,500,000 60.0% $1,500,000 $1,000,000 100,000 10.00% 25%
Assume that you have been hired as a consultant by CGT, a major producer of chemicals and plastics, including plastic grocery bags, styrofoam cups, and fertilizers, to estimate the firm's weighted average cost of capital. The balance sheet and some other information are provided below. Assets Current assets Net plant, property, and equipment Total assets Liabilities and Equity Accounts payable Accruals Current liabilities Long-term debt (40,000 bonds, $1,000 par value) Total liabilities Common stock (10,000,000 shares) Retained earnings Total shareholders' equity Total liabilities and shareholders' equity b. 15.88% The stock is currently selling for $23.35 per share, and its noncallable $1,000.00 par value, 25-year, 12.00% bonds with semiannual payments are selling for $912.28. The beta is 1.08, the yield on a 6-month Treasury bill is 4.00%, and the yield on a 25-year Treasury bond is 6.00%. The required return on the stock market is 12.00%, but the market has had an average annual return of 15.00% during the past 5 years. The firm's tax rate is 25%. Based on the CAPM, what is the firm's cost of equity? a. 9.36% c. 12.48% $38,000,000 $101,000,000 $139,000,000 d. 15.72% e. 12.64% $10,000,000 $9,000,000 $19,000,000 $40,000,000 $59,000,000 $30,000,000 $50,000,000 $80,000,000 $139,000,000 Screenshot
Transcribed Image Text:Assume that you have been hired as a consultant by CGT, a major producer of chemicals and plastics, including plastic grocery bags, styrofoam cups, and fertilizers, to estimate the firm's weighted average cost of capital. The balance sheet and some other information are provided below. Assets Current assets Net plant, property, and equipment Total assets Liabilities and Equity Accounts payable Accruals Current liabilities Long-term debt (40,000 bonds, $1,000 par value) Total liabilities Common stock (10,000,000 shares) Retained earnings Total shareholders' equity Total liabilities and shareholders' equity b. 15.88% The stock is currently selling for $23.35 per share, and its noncallable $1,000.00 par value, 25-year, 12.00% bonds with semiannual payments are selling for $912.28. The beta is 1.08, the yield on a 6-month Treasury bill is 4.00%, and the yield on a 25-year Treasury bond is 6.00%. The required return on the stock market is 12.00%, but the market has had an average annual return of 15.00% during the past 5 years. The firm's tax rate is 25%. Based on the CAPM, what is the firm's cost of equity? a. 9.36% c. 12.48% $38,000,000 $101,000,000 $139,000,000 d. 15.72% e. 12.64% $10,000,000 $9,000,000 $19,000,000 $40,000,000 $59,000,000 $30,000,000 $50,000,000 $80,000,000 $139,000,000 Screenshot
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