Difference in Financing (Same Operating Leverage – Different Financial Leverage)
Management of Lead Zepplins Blimp Co. has decided to invest in a new project. They are unsure, however, if they should finance it with debt or a new issue of common stock. The information on the project is as follows:
Expected Sales 30,000 units
Price Per Unit $160.00
Var Cost Per Unit $80.00
Tax Rate 40%
Fixed Cost $1,200,000
The total investment required is 3 million dollars. If the firm uses debt(i.e. issues bonds to pay for the new project) they will have to pay 10% on the new debt. (The firm currently has no debt outstanding.) They could, instead, issue 50 thousand shares of New Common stock (and ZERO bonds). (They currently have 100 thousand shares outstanding.)
A. Fill in the following statements and calculate EPS, DOL, DFL, & DTL under the two types of financing. Issue Bonds (No New Stock) Issue Stock (No Bonds)
SALES _____________ ______________
-VC _____________ ______________
-FC _______ ______________
EBIT _______ ______________
-I _______ ______________
EBT _______ ______________
- T _______ ______________
NIAT _______ ______________