Southern Inc. has EBIT of $3,500,000, and total capital of $20,000,000 that is 15% debt. There are 1,700,000 shares of stock outstanding which sell at book value. The firm pays 10% interest on its debt and is subject to a combined state and federal tax rate of 40%. Southern plans to restructure its capital to 60% debt.
a. Make a simple calculation that indicates whether at the current level of profitability more debt will enhance results? Draw a conclusion in fifteen words or less.
b. Calculate EPS, and DFL at the current and proposed structures using the following worksheet:
($000 except for EPS, DFL and Shares)
c. Use your results to point out two conflicting influences the change will have on stock price.

Question

Southern Inc. has EBIT of $3,500,000, and total capital of $20,000,000 that is 15% debt. There are 1,700,000 shares of stock outstanding which sell at book value. The firm pays 10% interest on its debt and is subject to a combined state and federal tax rate of 40%. Southern plans to restructure its capital to 60% debt. 
a. Make a simple calculation that indicates whether at the current level of profitability more debt will enhance results? Draw a conclusion in fifteen words or less. 
b. Calculate EPS, and DFL at the current and proposed structures using the following worksheet: 
($000 except for EPS, DFL and Shares)
  c. Use your results to point out two conflicting influences the change will have on stock price.

Quizplus · Accepted Answer

The Answer of Southern Inc. has EBIT of $3,500,000, and total capital of $20,000,000 that is 15% debt. There are 1,700,000 shares of stock outstanding which sell at book value. The firm pays 10% interest on its debt and is subject to a combined state and federal tax rate of 40%. Southern plans to restructure its capital to 60% debt. 
a. Make a simple calculation that indicates whether at the current level of profitability more debt will enhance results? Draw a conclusion in fifteen words or less. 
b. Calculate EPS, and DFL at the current and proposed structures using the following worksheet: 
($000 except for EPS, DFL and Shares)
  c. Use your results to point out two conflicting influences the change will have on stock price.