Williams Corp is analyzing whether to take on debt to increase EPS. Currently, the firm is an all-equity firm with $2.0 million in market value and 200,000 shares outstanding. The CFO is thinking of selling $1,000,000 of debt financing and using the proceeds to buy back stock.
The cost of debt is 8% annually. If the firm’s current EBIT is $140,000, should the CEO issue the debt and buy back the stock? Additionally what is the break-even EBIT for these two capital structure scenarios?
Laura’s Dress shop had sales of $400,000, cost of goods sold of $250,000, and SG&A expense of $60,000 in 2014. If sales are expected to grow 8% in the next year, forecast the company’s EBIT in 2015 using the percentage of sales method.
New Hope Properties, LLC purchased a property 3 years ago for $500,000. At the time, they spent $200,000 to demolish the existing structures and $70,000 to clean up the lot. The property is currently worth $650,000. New Hope now wants to construct a retail shopping center on the site at a cost of $2,500,000. What amount should be used as the initial cash flow for the project?