David Baseball Bat Company currently has Rs. 3,000,000 in debt outstanding, bearing an interest rate of 12 percent. It wishes to finance a Rs.…
BBS Fundamentals of Corporate Finance · 2077 · Solved Question with Answer
David Baseball Bat Company currently has Rs. 3,000,000 in debt outstanding, bearing an interest rate of 12 percent. It wishes to finance a Rs. 4,000,000 million expansion program and is considering three alternatives: additional debt at 14 percent interest (option 1), preferred stock with a 12 percent dividend (option 2), and the sale of common stock at Rs 100 per share (option 3). The company currently has 800,000 shares of common stock outstanding and is in a 40 percent tax bracket.
a. If earnings before interest and taxes are currently Rs. 1,500,000 what would be earnings per share for the three alternatives assuming no immediate increase in operating profit?
b. Determine the indifference point between the debt plan and the common stock plan.