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(Computing interest taxsavings) Dharma Supply has earnings before interest and taxes (EBIT) of $564,000, interest expenses of $278,000, and faces a corporate tax rate of 36 percent.
a.What is Dharma Supply’s net income?
b.What would Dharma’s net income be if it didn’t have any debt(and consequently no interest expense)?
c.What are the firm’s interest tax savings?
(Measuring growth) If Pepperdine, Inc.’s return on equity is 16 percent and the management plans to retain 55
percent of earnings for investment purposes, what will be the firm’s growth rate?
Hello. If someone could please assist with the following, I would be very appreciative. Thank you.
(Related to Checkpoint15.2) (EBIT-EPS analysis) Abe Forrester and three of his friends from college have interested a group of venture capitalists in backing their business idea. The proposed operation would consist of a series of retail outlets to distribute and service a full line of vacuum cleaners and accessories. These stores would be located inDallas, Houston, and San Antonio. To finance the new venture two plans have beenproposed:
Plan A is anall-common-equity structure in which $2.1 million dollars would be raised by selling 82,000 shares of common stock.
Plan B would involve issuing $1.5 million inlong-term bonds with an effective interest rate of 12.3 percent plus another $0.6 million would be raised by selling 41,000 shares of common stock. The debt funds raised under Plan B have no fixed maturitydate, in that this amount of financial leverage is considered a permanent part of thefirm’s capital structure.
Abe and his partners plan to use a 34 percent tax rate in theiranalysis, and they have hired you on a consulting basis to do thefollowing:
a. Find the EBIT indifference level associated with the two financing plans.
b. Prepare a pro forma income statement for the EBIT level solved for in part a that shows that EPS will be the same regardless whether Plan A or B is chosen.
(Cost of debt) Belton Distribution Company is issuing a $1, 000 par value bond that pays 7.0 percent annual interest and matures in 15 years that is paid semiannually. Investors are willing to pay $958 for the bond. The company is in the 18 percent marginal tax bracket.
What is the firm’s after-tax cost of debt on the bond?
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