Roberts,Inc

question 13

Essay

Roberts,Inc.is trying to decide how best to finance a proposed $10,000,000 capital investment.Under Plan I,the project will be financed entirely with long-term 9 percent bonds.The firm currently has no debt or preferred stock.Under Plan II,common stock will be sold to net the firm $20 a share; presently,1,000,000 shares are outstanding.The corporate tax rate for Roberts is 40 percent.
a.Calculate the indifference level of EBIT associated with the two financing plans.
b.Prepare an EBIT-EPS analysis chart,showing the intersection of the two financing plan lines.
c.Which financing plan would you expect to cause the greatest change in EPS relative to a change in EBIT?
Why?
d.If EBIT is expected to be $3.1 million,which plan will result in a higher EPS?

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Definitions:

Worker Satisfaction

The level of contentment employees feel about their job roles, workplace environment, and organizational policies, influencing their productivity and loyalty.

Increased Output

Refers to the enhancement in the quantity or quality of goods and services produced by an organization.

Physiological Needs

Basic human needs that are essential for survival, such as food, water, shelter, and sleep, as identified in Maslow's hierarchy of needs.

Relay Assembly

A method in manufacturing where components are assembled progressively as they pass along a sequence of workstations.