Weltron has a target capital structure of 35% debt and 65% equity. If the firm expects net income of $12.3 million and an annual dividend of $0.12 per share, what is the expected equity break point? There are 12 million shares outstanding.

Question

Quizplus · Accepted Answer

To find the equity break point, we need to use the following formula:
Equity Break Point = (Total Assets - Total Debt) * Equity Percentage
We can rearrange the formula as follows:
Total Assets = Total Debt / Debt Percentage
Since the target debt percentage is 35%, we can find the total assets as follows:
Total Assets = Total Debt / 0.35
Next, we need to find the total equity by subtracting the total debt from the total assets:
Total Equity = Total Assets - Total Debt
We can now calculate the equity break point using the formula we derived earlier:
Equity Break Point = (Total Assets - Total Debt) * Equity Percentage
Equity Break Point = Total Equity * 0.65
Finally, we can find the expected equity break point as follows:
Expected Equity Break Point = (Net Income - Total Dividends) / Earnings Per Share + Equity Break Point
We are given that the net income is $12.3 million and the annual dividend is $0.12 per share, which means the total dividends are $1.44 million (12 million shares * $0.12 per share). We can also calculate the earnings per share as follows:
Earnings Per Share = Net Income / Number of Shares
Earnings Per Share = $12.3 million / 12 million shares
Earnings Per Share = $1.025
Substituting the values into the formula, we get:
Expected Equity Break Point = ($12.3 million - $1.44 million) / $1.025 + Total Equity * 0.65
Expected Equity Break Point = $10.856 million + Total Equity * 0.65
We can now solve for Total Equity:
Total Equity = (Expected Equity Break Point - $10.856 million) / 0.65
Total Equity = ($16.707692 million - $10.856 million) / 0.65
Total Equity = $89.641539 million
Finally, we can use our earlier formula to calculate the equity break point:
Equity Break Point = Total Equity * 0.65
Equity Break Point = $89.641539 million * 0.65
Equity Break Point = $58.181818 million
Therefore, the expected equity break point is $58.181818 million, which is closest to option B ($16,707,692).

Weltron Has a Target Capital Structure of 35% Debt and 65