Origami Company is considering a new project and needs to raise $800,000 of capital. Their after-tax net income would be $75,000 if they do not implement the new project. If the new project is implemented, it will add an additional $50,000 of profits before tax and interest. Origami's income tax rate is 40%. If they use debt financing, the interest will be at 5%. Origami has 25,000 shares of common stock outstanding and no preferred stock. They would have to issue an additional 10,000 shares of common stock to finance the project with equity capital.
If Origami decides to use equity financing, their earnings per share will be higher than if they use debt.

Question

Quizplus · Accepted Answer

Calculations: $50,000 - ($800,000 × 5%) = $10,000
$10,000 - ($10,000 × 40%) = $6,000
($75,000 + $6,000)/25,000 = $3.24
$50,000 - ($50,000 × 40%) =$30,000
($75,000 + $30,000)/35,000 =$3.00

Origami Company Is Considering a New Project and Needs to Raise