Firm A wants to finance $5 million to support its new strategic plan. The firm...
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Accounting
Firm A wants to finance $5 million to support its new strategic plan. The firm expects that it will be able to generate $2 million in EBIT in the first year of implementing the strategy. The current stock price of Firm A is $10 and it has 1 million shares outstanding. The firm expects that it will be able to borrow money at 7% annual interest. Tax rate is 30%.
Answer the following questions.
1. Firm A considers raising the entire amount using debt.
How much interest does the firm need to pay in the first year? (3 points)
What is the level of net income (EAT) if the firm uses this financing method? (3 points)
What is the resulting EPS if the firm uses this financing method? (4 points)
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