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Define percentage change in earnings per share

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Question: A firm that wants to raise $21,000,000 has 500,000 common shares outstanding, with a current market value of $16 per share. The firm's tax rate is 45 percent.

(a) The alternatives are to issue an additional 1,400,000 common shares that would net the company $15 per share or to place 20-year debentures at face value with annual interest payments of 12 percent. Issuing and underwriting expenses can be ignored. Carry out a financial break-even analysis illustrating the ranges of earnings before interest and taxes for which each of the above alternatives appears superior in terms of earnings per share. Provide a diagram and compute the break-even point.

(b) The $21,000,000 could also be raised by issuing 525,000 preferred shares to net the company $40 per preferred share at an annual dividend rate of 10 percent. Include the proper line for the preferred-share alternative in your diagram from part (a).

(c) EBIT are expected to be $6,000,000, but could be 20 percent higher or lower than this figure. What would be the resulting percentage change in earnings per share and the degree of financial leverage under each of the financing alternatives?

Reference no: EM131750327

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