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-   -   Debt/ Asset Ratio VS. All-equity Cap Structure (https://www.askmehelpdesk.com/showthread.php?t=162672)

  • Dec 14, 2007, 10:20 AM
    ckust08
    Debt/ Asset Ratio VS. All-equity Cap Structure
    Hey you, I was hoping someone could help me with this problem...

    Chitown is a new firm seeking to finance $20 million in assets. It is considering a 40 percent deb/ asset ratio vs. an all equity capital structure. New debt will carry interest charges of 12 percent and new shares can be sold for $20 per share.

    A) What is the number of shares under each plan?

    B) Assuming a 40-percent tax rate, find the level of EBIT at which both plans will have the same EPS?
  • Dec 15, 2007, 03:37 AM
    manik chand dey
    40% debt asset ratio Vs all equity

    A)No of shares 600,000 100,00,00
  • Dec 17, 2007, 03:20 AM
    manik chand dey
    B) In order to calculate the level of EBIT at which both plans will have same EPS, we need to equalise the EPS under both the plans.

    Let say x = the level of EBIT

    Debt/Equity Plan All Equity Plan
  • Dec 17, 2007, 03:31 AM
    manik chand dey
    Let say x= the level of EBIT

    Debt Equity Plan All equity Plan
    EPS (x-960000)(1-0.40)/600000 x(1-0.40)/1000000

    Now equating this EPS under both the plans we will be getting x equals to around$10,21,276.
    This is the level of EBIT where financial breakeven point is achieved, otherwise called as indifference point.

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