23 Jul HOW MUCH HIGHER OR LOWER WILL THE FIRMS EXPECTED EPS BE IF IT USES SOME DEBT RATHER THAN ONLY EQUITY
vYour girlfriend plans to start a new company to make a new type of cat litter. Her father will finan Show more Your girlfriend plans to start a new company to make a new type of cat litter. Her father will finance the operation but she will have to pay him back. You are helping her and the issue now is how to finance the company with equity only or with a mix of debt and equity. The price per unit will be $10.00 regardless of how the firm is financed. The expected fixed and variable operating costs along with other information are shown below. How much higher or lower will the firms expected EPS be if it uses some debt rather than only equity i.e. what is EPS EPS? 0% Debt U 60% Debt L Expected unit sales 240000 240000 Price per unit $10.00 $10.00 Fixed costs $1000000 $1000000 Variable cost/unit $3.50 $3.50 Required investment $2500000 $2500000 Shares issued at $10/share 250000 100000 % Debt 0.00% 60.00% Debt $ $0 $1500000 Equity $ $2500000 $1000000 Interest rate NA 10.00% Tax rate 35.00% 35.00% Answer $1.04 $1.21 $1.15 $0.93 $1.10 Show less
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