Question

Master Cylinders has 15,000 shares of stock outstanding and no debt as the original founder of the firm did not approve of debt financing. The new CEO is considering issuing $500,000 of debt and the shares will be 10,000 shares. The interest rate on debt is 18% percent. What is the earning per share if earnings before interest and taxes (EBIT) is $600,000 between these two capital structure options? Explain financial leverage providing different views of using debts in capital structure?

Answer 1

Explain financial leverage providing different views of using debts in capital structure?

1. By using debt financing ownership and controls of the company stays with the current shareholders'

2. By Using Debt financing we can get tax benefit from interest payment

3. Debt financing will helps to improve credit worthiness of the company

4. But excessive usage of debt financing will lead to high business risk where the company will bankrupt if the interest payments were not made

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