Can someone answer the following question with the work on how they got the answ
ID: 2713737 • Letter: C
Question
Can someone answer the following question with the work on how they got the answers?
Use the following information to answer the questions below. Current cap. structure Proposed cap. structure Assets $15 million $15 million Debt $0 $6 million Equity $15 million $9 million Share price $25.00 $22.50 Shares outstanding 600,000 ??? Bond coupon rate N/A 8% Assume that there are no taxes. EBIT is expected to be $2.5 million, but could be as high as $3.5 million if an economic expansion occurs, or as low as $2 million if a recession occurs. All values are market values. 1. How many shares are outstanding under the proposed capital structure? 2. What is the expected EPS under the current capital structure if there is a recession? 3. What is ROE for the proposed capital structure if the expected state occurs? 4. Write out the equation to find EBIT*, the breakeven EBIT for these two capital structures? Make sure in your equation EBIT* is the only unknown variable with all other numbers correctly specified. Explain what the LHS and the RHS of your equation represent, respectively.
Explanation / Answer
Capital Structure Actual Proposal Assets(in M) $15.00 $15.00 Debt(in M) $0.00 $6.00 Equity(in M) $15.00 $9.00 EBIT(in M) $2.50 $3.50 $2 Share Price $25.00 $22.50 Shares Outstanding 600000 1.Under proposed Structure Shares Outstanding 400000 2.EPS under current Structure in case of recession 3.33 3.ROE of proposed Structure EBIT=$2.5 M Interest= $480,000.00 Net Income= $2,020,000.00 ROE= 22.44% 4. Break even EBIT for first case=0 For proposed Structure, Interest amount= Breakeven EBIT Interest amount=debt x Interest rate=$6000000*8%=$480000