Question

# Firm A wants to finance \$5 million to support its new strategic plan. The firm expects...

Firm A wants to finance \$5 million to support its new strategic plan. The firm expects that it will be able to generate \$2 million in EBIT in the first year of implementing the strategy. The current stock price of Firm A is \$10 and it has 1 million shares outstanding. The firm expects that it will be able to borrow money at 7% annual interest. Tax rate is 30%.

1. Firm A also wants to consider combining debt and equity financing methods. If the firm goes for 20% debt and 80% equity to raise the target amount, what is the resulting EPS?

 Computation of EPS Particulars Amount in \$ a Expected EBIT 2,000,000.00 b Interest (7%*1000000) 70,000.00 c Profit before tax (a-b) 1,930,000.00 d Tax@30% (c*30%) 579,000.00 e Profit after tax (c-d) 1,351,000.00 f shares outstanding 1,000,000.00 g EPS (e/f) 1.35 debt= 5000000*20% 1,000,000.00 Note: We have assumed that the company has not distributed divdends as no such information is given in the question and hence entire profit is available to the shareholders.