1 Learn the debt versus equity analysis as depicted in the Flow Diagram
2 Interpret an EBIT chart highlighting the indifference level of EBIT
3 Interpret the debt capacity analysis
Consider the numerous, sometimes conflicting elements in the financing decision as summarized by the FRICTO acronym - income, risk, control, marketability, flexibility, and timing.
Focus on the Leahy Bread Company analysis to learn how the DEBT vs. EQUITY FINANCING template works.
The Debt vs Equity Financing tab on the Assignment 6 Template is the same template worked out for Leahy in the book.
All data in the DEBT vs. EQUITY FINANCING template is entered for you in cells B3.B12 and row 65.
You are asked to interpret the template; there are no data entries to make.
1 Explain how the EBIT Chart works (inputs determining the outputs-the two lines on the chart and the indifference point) in YOUR OWN WORDS.
2 Page 112 of the book shows LBCs forecast. Discuss the range of likely EBITs and relate them to the indifference EBIT - in your opinion, will future EBIT be lower than or higher than indifference EBIT?
3 Explain the meaning of the debt capacity calculation at row 62.
4 Recommend either debt or equity for the $392,675 financing and explain your reasoning. Frame your answer using the FRICTO framework, p 119 in the book, citing specifics from the analysis.