Purchase Solution

Earnings and Leverage, Investment Opportunity, Tax Shield, WACC, Market value

Not what you're looking for?

Ask Custom Question

Attached is an Excel file with five problems:

E15: Earnings and leverage
E19: Capital investment opportunity
E22: Tax shields
E23: WACC
E24: Market value of firm

Attachments
Purchase this Solution
Solution Summary

The investment opportunities, tax shields, WACC and market values are examined.

Solution Preview

Please see the attached Excel file for the complete tutorial.

15. Earnings and Leverage. Reliable Gearing currently is a all-equity-financed. It has 10,000 shares of equity outstanding.
Selling at $100 a share. The firm is considering a capital restructuring. The low-debt plan calls for a debt issue of $200,000 with the proceeds used to buy back stock.

The high-debt plan would exchange $400,000 of debt for equity. The debt will pay an interest rate of 10% The firm pays no taxes.

a. What will be the debt-to-equity ratio after each contemplated restructuring?

b. If earnings before interest and tax (EBIT) will be either $90,000 or $130,000, what will be earnings per share for each financing mix for both possible values of EBIT?

If both scenarios are equally likely, what is expected EPS under ...

Purchase this Solution
Free BrainMass Quizzes
Basics of corporate finance

These questions will test you on your knowledge of finance.

Academic Reading and Writing: Critical Thinking

Importance of Critical Thinking

Social Media: Pinterest

This quiz introduces basic concepts of Pinterest social media

Introduction to Finance

This quiz test introductory finance topics.

Writing Business Plans

This quiz will test your understanding of how to write good business plans, the usual components of a good plan, purposes, terms, and writing style tips.

View More Free Quizzes
Related BrainMass Solutions

  • Leverage and Optimal Capital Structure

    Market value of No Leverage, Inc b. Market value of High Leverage, Inc c. Present value of the tax shield to High Leverage Inc.

  • Constant Interest Coverage Policy

    When a firm uses leverage to shield income from corporate taxes, it adjusts its debts level to increase the interest expenses with its earnings.

  • Market Value Leverage Ratio; Value of the Tax Shield

    Tax shield = Market value of Debt *Tax rate=$9000*33%=$2970. The solution determines the market value leverage ratio and the value of the tax shield.

  • Leverage and value of investments

    In other words, the debt financing has a tax shield. Hence, even though earnings could be lower as a result of the leverage, the income tax shield from the interest expense could result to a higher cash flow for the levered firm.

  • Multiple Choice Questions

    e. value of the firm is equal to the value defined by M&M Proposition I, with tax. Answer: c. value of the firm equalizes the costs of financial distress with the present value of the tax shield on debt.

  • Calculate the firm's WACC - Q & R Manufacturing

    Debt According to Zhang (2009) "the main benefit from debt financing is corporate income tax savings, conventionally referred to as the tax shield (p. 120).

  • Jackson Technology's Average Cost of Capital

    Equity includes retained earnings and the cost of R/E is taken at cost of equity. Cost of equity capital is the opportunity return from an investment with same risk as the company has.

  • WACC and after-tax cost

    Equity includes retained earnings and the cost of R/E is taken at cost of equity. Cost of equity capital is the opportunity return from an investment with same risk as the company has.

  • Time Warner's: Capital Structure and Cost of Capital

    Equity includes retained earnings and the cost of R/E is taken at cost of equity. Cost of equity capital is the opportunity return from an investment with same risk as the company has.

View More Related Solutions