Your corporation is currently all-equity financed with 400,000 shares of common stock selling for $37 a share. Currently your firm generates $3,000,000 in EBIT annually and has a 32% dividend payout ratio. Your firm's tax rate is 35%. a. What is your firm's current earnings per share and dividend per share? b. Your firm is considering financing an expansion with a bond issue of $8,500,000 that will pay 5.7% annually in interest. If the expansion increases your firm's EBIT to $5,500,000, what will be your firm's new debt-to-equity ratio, EPS, and dividend per share? c. If the expansion is instead financed with an issue of new stock, what will be your firm's new EPS and dividend per share? a. Calculate the firm's current earnings per share (EPS) and dividend per share (DPS) below: (Round to the nearest dollar except for the EPS and DPS which should be rounded to the nearest cent.)
Cost of Capital
Shareholders and investors who invest into the capital of the firm desire to have a suitable return on their investment funding. The cost of capital reflects what shareholders expect. It is a discount rate for converting expected cash flow into present cash flow.
Capital Structure
Capital structure is the combination of debt and equity employed by an organization in order to take care of its operations. It is an important concept in corporate finance and is expressed in the form of a debt-equity ratio.
Weighted Average Cost of Capital
The Weighted Average Cost of Capital is a tool used for calculating the cost of capital for a firm wherein proportional weightage is assigned to each category of capital. It can also be defined as the average amount that a firm needs to pay its stakeholders and for its security to finance the assets. The most commonly used sources of capital include common stocks, bonds, long-term debts, etc. The increase in weighted average cost of capital is an indicator of a decrease in the valuation of a firm and an increase in its risk.
shares of common stock selling for $37 a share. Currently your firm generates $3,000,000 in EBIT annually and has a 32% dividend payout ratio. Your firm's tax rate is 35%.
that will pay 5.7% annually in interest. If the expansion increases your firm's EBIT to $5,500,000, what will be your firm's new debt-to-equity ratio, EPS, and dividend per share?
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EBIT
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$
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Less: Interest expense
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?
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Net profits before taxes
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$
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Less: Taxes (35%)
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?
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Net income
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$
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?
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Earnings per share (EPS) of common stock
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$
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?
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Common stock dividends
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$
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?
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Common stock dividend per share (DPS)
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$
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?
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Common stock shares outstanding
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400,000
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Stock price
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$
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37
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