The following table contains a list of selected information from the financial s

Question

The following table contains a list of selected information from the financial statements of Scouser Co. Based on the preceding information, what is the EBIT that Scouser Co. must achieve in order to hit its financial breakeven point? 438.85 43.07 47.85 477.31 45.46 After further analysis, Scouser Co. has determined that it will not be issuing preferred dividends as it had previously planned. What sort of additional decision-making flexibility will this offer the managers of Scouser Co., while still allowing the company to meet its financial breakeven point? Scouser Co. could pay off 75% of its long-term debt. Scouser Co. could borrow an additional $173 million at its current borrowing rate to finance expansion. Scouser Co. could repurchase 20% of its outstanding common stock. Scouser Co. could borrow an additional $190 million at its current borrowing rate to finance expansion.

Explanation / Answer

Financial BEP = I +Dp/(1-t)

Where I = Annual Interest charges

Dp = Preferred dividend

T = Tax rate

Financial BEP = $47.85 mil

For second case, company can borrow additional $173 million at current borrowing rate and keep the same financial breakeven. It is possible because after tax benefits of stopping preferred dividends is D/(1-t) which is equal to interest paid on additional debt

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