1 Is the profound balance sheet given in this question or should I have been abl

Question

1 Is the profound balance sheet given in this question or should I have been able to work out figures from the question ?
2 why do t I discount tax offset for debt before calculating profit after tax ?
3. How do I draw this graph ? What is process to get slope of lines ?
Thank you ! llple, we Caicuiate the indifference level of EBIT using equation -4has follows EBIT-$40001-0.30) (EBIT $82010.30) 2000 1500 Checkpoint 15.2 Evaluating the effect of financing decisions on EPS veratng profit (EBIT) by $10000 per year from the current level of $20000 to $30000. The firm can ra ouse of Toast Pty Ltd is considering a new nvestment which will cost $50000 and 500 ordnary shares at $100 each, or (2) selling bonds that will net the fim $50000 and cay an What is the EPS for the expected level of EBIT equal to $30000? What is the effect of the fran which will increase the fim's arrual se he $50000 by (1) arnual interest rate of cng ahemaltives on the te and volatity of the fim's EPS f tne fim antcpates that its EIT vull tal within the range of $20000 to SA0000 per year? STEP 1: Picture the problem The current and prospective capital-structure alternatives can be described using pro forma balance sheets as follows Existing capital structure With new ordinary share financing With new debt financing Long-term debt at 8% Long-term debt at 8% Long-term debt at 85% Ordinary shares $ 50000 $ 5000 Long-term debt at 8% Ordinary shares Total liabilities S 5000 5000 150000 $250000 150000 Ordinary shares 20000 $200000 Total liabilities $250000 Total liabilities and equity and equity and equity Ordinary shares outstanding 1 500 Ordinary shares 2000 Ordinary shares 1500 outstanding outstanding STEP 2: Decide on a solution strategy A firm's capital-structure choice will affect both the level of EPS for a given level of operating profit (EBIT) and the volatility of changes in EPS corresponding to changes in EBIT. To analyse both of these attributes of the problem, we use pro forma income statements for a range of levels of EBIT that the firm believes is relevant to its future performance. STEP 3: Solve projected EBIT level of $30000 Pro forma income statements for the two financing alternatives evaluated at the reveal that EPS for the ordinary share and debt alternatives are $9.10 and $10.15, respectively capital structure With new ordinary share financing With new debt financing $30000 $21 750 $15225 $ 10.15 EBIT $20000 S30000 Less: Interest expense Profit before tax $16000 S26000 Less: Tax at 30% Net profit Ordinary shares outstanding EPS Net profit/Ordinary shares outstanding S11 200 1 500 S 7.47 $18 200 2000 S 9.10 500

Explanation / Answer

2. We get tax rebate on interest payment on the loan financing.So before calculating taxes we reduced interest amount from the total earning which is written as EBIT (earning before interest and taxes). Interest reduced our total taxable amount and get tax benefits.

3. In graphs of EBIT-EPS we have two lines loan financing and equity model. In both of them number of outstanding shares are same. In new loan financing EBIT is high. It indicate loan amount is used for the growth of the company that increases EBIT of the loan financing line. Due to high loan amount its interest is also high that gives high tax benefits and company have to pay less taxes. Due to this net profit is high and EPS is net profit/no. of shares out standing, so EPS is also high.

So, in the graph of EBIT-EPS we can see neew loan financing line is on the upper side with more profit and equity line is in lower side and a gap is seen their.

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