Question

Based on the following set of information, do an EPS-EBIT analysis. You need to consider the following financing options: 100% debt, 75% debt and 25% equity, 50% debt and 50% equity, 25% debt and 75% equity, and 100% equity.

• Amount of capital needed: $100 million
• Estimated EBIT range
  • Low end: $30 million (recession scenario)
  • Midpoint: $40 million (normalcy scenario)
  • High end: $50 million (boom scenario)

•Interest rate: 4 percent

•Tax rate: 30 percent

•Stock price: $50

•Number of shares outstanding: 500 million

Your analysis should be accompanied with a thorough interpretation of results. You also need to generate a EPS/EBIT chart.

Answer 1

Answer :

EPS - Earning per share

EBIT - Earning before income tax

Their are 4 case 100% debt, 75% debt, 50% debt, 25% debt

We will calculate interest on debt at rate of 4%, Interest = Debt*Rate/100(shown in table below)

We wil calculate tax on earning at rate of 30%, Tax = Profit*30/100 but profit = EBIT - INterest

Therefor EPS = Profit after interest and Taxes/ Number of shares (Shown in table)

Case	Debt	Equity	Interest Rate	Interest	Tax Rate	Tax	Stock price	Number of share	EBIT Low	EBIT Mid	EBIT High	EPS Low	EPS Mid	EPS High
1	100	0	4	40	30	-3	0.00005	500	30	40	50	-0.0140	0.1000	0.3250
2	70	25	4	28	30	0.6	0.00005	500	30	40	50	0.0028	0.3800	0.5350
3	50	50	4	20	30	3	0.00005	500	30	40	50	0.0140	0.5667	0.6750
4	25	75	4	10	30	6	0.00005	500	30	40	50	0.0280	0.8000	0.8500
5	0	100	4	0	30	9	0.00005	500	30	40	50	0.0420	1.0333	1.0250