Question

Date Wireless has the following assets:

Current assets : Temporary	$1,150,000
Permanent	1,300,000
Capital assets	7,750,000
Total assets	$10,200,000

   

Its operating profit (EBIT) is expected to be $2.5 million. Its tax rate is 30 percent. Shares are valued $20. Capital structure is either short-term financing at 5 percent or equity. There is no long-term debt. (Round the final answers to 2 decimal places.)

a.	Calculate expected earnings per share (EPS) if the firm is perfectly hedged.

    

EPS

$

b.	Calculate expected EPS it has a capital structure of 30% debt.

   

EPS

$

c.	Recalculate a and b if short-term rates go to 12 percent.

    

	EPS
Hedged	$
Capital structure	$

Answer 1

Since it has only short term financing, then only current assets will be financed by short term financing rest by equity.

So

Equity = 10200000-1150000 = 9050000

Interest = 0.05*1150000 = 57500

So, EBT = 2500000-57500

And net income = (2500000-57500)*(1-0.3) = 1709750

So, EPS = 1709750/(9050000/20) = 3.78

B. If capital structure has 30% debt.

Equity = 0.7*10200000 = 7140000

Interest = 0.05*0.3*10200000 = 153000

So, net income = (2500000-153000)*(1-0.3)

= 1642900

EPS = 1642900/(7140000/20) = 4.6

C.

A. Interest = 0.12*1150000 = 138000

Net income = (2500000-138000)*(1-0.3) = 1653400

EPS = 1653400/(90500000/20) = 3.65

B. Interest = 0.12*0.3*10200000 = 367200

Net income = (2500000-367200)*(1-0.3)

= 1492960

EPS = 1492960/(7140000/20) = 4.18