Question

Can I please have answers to the following questions:

sted cash Hlows and net present values. d. the ranking of capital in terms of riskiness and the choice based on this ranking. Oe. the organizational structure that will llow a firm to obtain the best cost of capital A firm has the following information for the last two years. Calculate its degree of financial leverage Sales Operating costs Net income Number of shares outstanding This year $1,500,000 $900,000 $150,000 50,000 Last year $1,300,000 $800,000 120,000 50,000 Select one: O a. 1.25 b. 6.25 Oc.1.04 O d. 0.21 O e, insufficient information to calculate DOL Allegra Inc. has one million shares outstanding. The company is considering the issue of debt of S15 malion. The interest rate on this new debt issue will be 9%, and the number of shares after the debt issue ill be reduced to 50 00 Given a corporate tax rate of 40%, what is the EBIT that cause the fr san per share to be indifferent between issuing and not issuing debt? Select one: a. $1,200,000 b. $1,800,000 O c. $2,400,000 d. $3,000,000 e. $3,600,000

Answer 1

Degree of Financial Leverage(DFL) is given by,

Percentage change in EPS/Percentage change in EBIT

	This Year	Last Year
EPS (Net income/no. of shares outstanding)	3	2.4
EBIT (Sales-Operating Cost)	600	500

DFL=25%/20%=1.25

$2,400,000/- is the EBIT that will cause the firm's EPS to be indifferent between issuing and not issuing debt.

	Issuing Debt	Not issuing Debt
EBIT	2,400,000	2,400,000
Less:Interest	1,200,000	-
EBT	1,200,000	2,400,000
Less: Tax@40%	480,000	960,000
PAT	720,000	1,440,000
No. of Shares	500,000	1,000,000
EPS	1.44	1.44