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The Phoenix Corporation

The Phoenix Corporation has the following financial statistics:

· expected EBIT next year without new financing $10 million

· expected interest payment next year $ 1.0 million

· company tax rate 36%

· market price of common stock $10

· common shares outstanding 1 million

· You are CFO of this firm. You are considering borrowing an additional $5 million at an interest cost of 9% per year. You will use the funds to repurchase outstanding common stock at the current market price. Of course, this transaction would have no impact on your expected EBIT.

a) Calculate your times interest earned ratio both with and without the new
debt financing.

b) Calculate the expected EPS next year, both with and without the new debt
financing.

c) Would the M&M theorem identify this as a value-creating move? Why or
why not?

Solution Preview

See the attached file.
Finance
The Phoenix Corporation has the following financial statistics:

? expected EBIT next year without new financing $10 million

? expected interest payment next year $ 1.0 million

? company tax rate 36%

? market price of common stock $10

? common shares outstanding 1 million

? You are ...

Solution Summary

This solution is comprised of a detailed explanation to calculate your times interest earned ratio both with and without the new debt financing and the expected EPS next year, both with and without the new debt financing and answer would the M&M theorem identify this as a value-creating move.

$2.19