XYZ Corporation is planning to raise an additional $30 million in captial, eithe
ID: 2666041 • Letter: X
Question
XYZ Corporation is planning to raise an additional $30 million in captial, either via 240,000 shares of common stock at $125 per share net proceeds or via 300,000 shares of 9% preferred stock. Current earnings are $12.50 per share on one million shares outstanding. $2,500,000 is paid annually on existing debt, and dividends on existing preferred stock amount to $1,500,000 per year. The current market price of common stock is $140 per share. The firm has a dividend policy of paying $8 per share on common stock which it intends to keep. Assume a tax rate of 46%.What is the least amount of incremental earnings from the planned expansion required to meet the incremental cost of capital from either source?
What is the breakevan EBIT for both sources of capital?
Explanation / Answer
Equity Shares Preference Shares Required Cash $30,000,000 $30,000,000 Shares 240000 300000 Issue price $125 $100 Required Dividend per Share $8 9% Incremental Dividene = 240000 * 8 = 30,000,000 * 9% Incremental Cost $1,920,000 $2,700,000 Break Even EBIT(100 - 46 = 54) = 1,920,000 * 100/54 = 2,700,000 * 100 /54 Break Even EBIT $3,555,555 $5,000,000 Less: Tax 46% = 3,555,555 *46% = 5,000,000 * 46% $1,635,555 $2,300,000 Net Income to Shareholders $1,920,000 $2,700,000Thank you.... Equity Shares Preference Shares Required Cash $30,000,000 $30,000,000 Shares 240000 300000 Issue price $125 $100 Required Dividend per Share $8 9% Incremental Dividene = 240000 * 8 = 30,000,000 * 9% Incremental Cost $1,920,000 $2,700,000 Break Even EBIT(100 - 46 = 54) = 1,920,000 * 100/54 = 2,700,000 * 100 /54 Break Even EBIT $3,555,555 $5,000,000 Less: Tax 46% = 3,555,555 *46% = 5,000,000 * 46% $1,635,555 $2,300,000 Net Income to Shareholders $1,920,000 $2,700,000
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