PROBLEM: 1. The Connecticut Computer Company has the following selected financia

Question

PROBLEM:

1.              The Connecticut Computer Company has the following selected financial results.

10% Debt              40% Debt              75% Debt

Debt $ 10,000

Equity 90,000

Total Capital $100,000

Shares @ $5 18,000

EBIT $18,000

Interest ( 15%) 1,500

                  EBT $16,500

                  Tax (40%) 6,600

                  EAT $ 9,900

                  ROE

                  EPS

The company is considering a capital restructuring to increase leverage from its present level of 10% of capital.

a. Calculate Connecticut’s ROE and EPS under its current capital structure.

b. Restate the financial statement line items shown, the number of shares outstanding, ROE, and EPS if Connecticut borrows money and uses it to retire stock until its capital structure is 40% debt assuming EBIT remains unchanged and the stock continues to sell at its book value. (Develop the second column of the chart shown.)

c. Recalculate same figures assuming Connecticut continues to restructure until its capital structure is 75% debt. (Develop the third column of the chart.)

Explanation / Answer

Solution everythbing in the table along with formulaes:

Formula 10% debt 40% 75% Debt 10000 40000 75000 Equity 90000 60000 25000 total capital Debt+equity 100000 100000 100000 shares no of shares 18000 18000 18000 EBIT 18000 18000 18000 interest 15% total debt*% 1500 6000 11250 EBT Ebit-interest 16500 12000 6750 Tax 40% tax rate 6600 4800 2700 EAT EBT- tax 9900 7200 4050 ROE EAT/shareholders equity 11% 12% 16% EPS EAT/no of shares 0.55 0.4 0.225

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