Question: Perform an EPS/EBIT Analysis for Nestlé S.A.
Purpose: An EPS/EBIT analysis is one of the most widely used techniques for determining the extent that debt and/or stock should be used to finance strategies to be implemented. This exercise can give you practice performing EPS/EBIT analysis.
Instructions: In order to expand into Africa, Nestlé needs to raise $1 billion. Determine whether Nestlé should use all debt, all stock, or a 50-50 combination of debt and stock to finance this market-development strategy. Assume a 20 percent tax rate, 3 percent interest rate, Nestle stock price of $30 per share, and an annual dividend of $0.50 per share of common stock. The EBIT range for 2015 is between $1.0 billion and $2 billion. A total of 500 million shares of common stock are outstanding. Develop an EPS/EBIT chart to reflect your analysis.