Conrad Cups is forecasting an EBIT of $300,000 with a standard deviation of $60,000. They currently have 400,000 shares on issue. The company wants to raise $1,500,000 for expansion purposes, and is contemplating the following alternatives:
A. Raise $1 million from issuing shares at $1.25 and $500,000 from borrowings at 14%
B. Raising $1.5 million from borrowing at 14%
The company’s tax rate is 30%.
What is the Earnings Per Share (EPS) under each scenario?
| Scenario A | Scenario B | |||
| EBIT | 300000 | 300000 | ||
| Less: Interest | (500,000*14%) | 70000 | (1,500,000*14%) | 210000 |
| EBT | 230000 | 90000 | ||
| Taxes 30% | (230,000*30%) | 69000 | (90,000*30%) | 27000 |
| Net income | 161000 | 63000 | ||
| EPS | (161,000/1,200,000) | 0.13 | (63,000/400,000) | 0.16 |
| Note: Number of additional shared in Scenario A = 1,000,000/1.25 | ||||
| = 800,000 | ||||
Conrad Cups is forecasting an EBIT of $300,000 with a standard deviation of $60,000. They currently...