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:

Debit Column

The left-hand side of a ledger account, recording increases in assets and expenses, and decreases in liabilities, equity, and revenue.

Expense Recognition Principle

An accounting principle that dictates expenses should be recognized in the period in which they are incurred to earn revenues.

Efforts

The use of physical or mental energy to achieve tasks and goals.

Accomplishments

Achievements or completed goals that an individual or organization has successfully attained.