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problem: A firm has no outstanding debt & a total market value of 200,000. Earnings before interest & taxes (EBIT) are projected to be 25,000 if economic situations are normal. If there is a strong expansion, EBIT is expected to increase to 35,000, & if there is a recession the firm's EBIT is expected to refuse to 10,000. The firm is considering a 70,000 debt issue with a 6% interest rate, where the proceeds will be used to repurchase shares of stock. There are currently 4,000 shares outstanding. Ignore all taxes.

Determine the breakeven level of EBIT, & what does it imply regarding whether or not the firm should go ahead with new debt issue?

Basic Finance, Finance

  • Category:- Basic Finance
  • Reference No.:- M917513

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