A Firm's Capital Structure Is Made Up of 200,000 Common

question 8

Essay

A firm's capital structure is made up of 200,000 common shares and $1,000,000 debt at 12% interest.The company's tax rate is 50%.An additional $500,000 has to be raised, and the following financing alternatives are available:
Option 1: Common shares: The company can sell additional shares at $10 a share.Hence, 50,000 new shares would have to be issued.
Option 2: Debt: Debt can be issued at 12%, requiring interest payments of $60,000.
Compute EPS as a function of EBIT for both alternatives and derive the break-even point.

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Definitions:

Extrapolation

The process of estimating beyond the original observation range, based on the trend of the data.

Multiple Linear Regression Analysis

It is a statistical technique that uses several explanatory variables to predict the outcome of a response variable.

Data Entry

The process of inputting data or information into a computer or database system, often for the purpose of analysis or record keeping.

Software Program

A collection of instructions that enable a computer to perform specific tasks or operations; also referred to as software applications or simply software.