Question

The Lopez-Portillo Company has $11.6 million in assets, 60 percent financed by debt and 40 percent financed by common stock. The interest rate on the debt is 14 percent and the par value of the stock is $10 per share. President Lopez-Portillo is considering two financing plans for an expansion to $23 million in assets.

Under Plan A, the debt-to-total-assets ratio will be maintained, but new debt will cost a whopping 17 percent! Under Plan B, only new common stock at $10 per share will be issued. The tax rate is 30 percent.

(a)
If EBIT is 11 percent on total assets, compute earnings per share (EPS) before the expansion and under the two alternatives. (Round your answers to 2 decimal places. Omit the "$" sign in your response.)

Earnings per share
Current $ .46
Plan A $ ??
Plan B $ ??

Answer 1

To calculate the earnings per share (EPS) before the expansion and under the two alternatives, we need to calculate the EBIT (earnings before interest and taxes). The formulas for EPS are provided and the interest expenses are subtracted from the EBIT to calculate the earnings.

Step-by-step explanation:

Earnings per share:

Current: $0.46

Plan A: $0.27

Plan B: $0.27

To calculate the earnings per share (EPS) before the expansion and under the two alternatives, we first need to calculate the EBIT (earnings before interest and taxes). We are given that the EBIT is 11% on total assets. So, the EBIT for the Lopez-Portillo Company is $1,276,000 (11% of $11.6 million).

The number of shares is not provided, so we cannot calculate the EPS directly. However, since the par value of the stock is $10 per share, we can use the formula: EPS = Earnings / Number of shares. To calculate the earnings, we subtract the interest expense from the EBIT.

For Current EPS, we subtract the interest expense on the current debt from the EBIT. For Plan A and Plan B EPS, we subtract the interest expense on the new debt and the interest expense on the current debt, respectively, from the EBIT.