You work for the CEO of a new company that plans to manufacture and sell a new type of laptop computer. The issue now is how to finance the company, with only equity or with a mix of debt and equity....

You work for the CEO of a new company that plans to manufacture and sell a new type of laptop computer. The issue now is how to finance the company, with only equity or with a mix of debt and equity. Expected operating income is $690,000. Other data for the firm are shown below. How much higher or lower will the firm's expected EPS be if it uses some debt rather than only equity, i.e., what is EPS_L - EPS_U?

	0% Debt, U	60% Debt, L
Oper. income (EBIT)	$690,000	$690,000
Required investment	$2,500,000	$2,500,000
% Debt	0.0%	60.0%
$ of Debt	$0.00	$1,500,000
$ of Common equity	$2,500,000	$1,000,000
Shares issued, $10/share	250,000	100,000
Interest rate	NA	10.00%
Tax rate	35%	35%

Select one:

$1.29

$1.97

$2.23

$1.63

$1.72

Jun 07, 2022

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You work for the CEO of a new company that plans to manufacture and sell a new type of laptop computer. The issue now is how to finance the company, with only equity or with a mix of debt and equity....

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