Sinclair, Inc. is a levered firm with assets valued at $10,000 and has debt issu
ID: 2804928 • Letter: S
Question
Sinclair, Inc. is a levered firm with assets valued at $10,000 and has debt issued at 10% interest. Sinclair pays tax at the rate of 34%. The firm faces EBIT scenarios of recession and boom. [Note: EBIT earnings before interest and tax, $ Interest dollar amount of interest owed on the debt, NBT-net income before tax, NI = net income, EPS = earnings per share! Assume that firms with negative NIBT pay no tax. A portion of the inputs to the income statement are provided below, and a portion is not. Use the information above to fill in all the missing values. EBIT $INTEREST NIBT TAXESNI EPS $900 $1.32 BOOM RECESSION $200 ($550) 23. If Sinclair's leverage factor is 4, what amount comes closest to the amount of debt issued? A. 2,500 B. 4,000 C. 5,000 D. 6,500 E. 7,500 24. What amount comes closest to Sinclair's NI is the BOOM scenario? A. $99 B. $90 C. $66 D. $60 E. $51 25. What amount comes closest to Sinclair's EPS in the RECESSION scenario? A. ($7.33) B. ($3.33) C. $0 D. $3.33 E. $7.33Explanation / Answer
(i) Amount of debt can be calculated using = Given EBIT 200 Less : Interest (Let) x NIBT -550 EBIT- x = NIBT x = EBIT - NIBT x = 200-(-550) x = 750 Also rate of interest = 10% Interest = Loan amount x rate 750 = Loan amount x 0.1 Loan amount = 750/0.1 Loan amount = 7500 Answer 7500 (e) (ii) Recession Boom EBIT 200 900 - Interest 750 750 NIBT -550 150 - Tax @ 34% 0 51 Ni -550 99 EPS NI/No. of shares -7.33333 1.32 No. of shares (NI/ EPS) 75 75 Answer 99 (a) (iii) EPS in resession = -7.33 (a) Please provide feedback…. Thanks in advance…. :-)