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Homework answers / question archive / Florence Flooring Limited is considering two different financing plans
Florence Flooring Limited is considering two different financing plans. 1. Under plan I the interest would be 8% on $100,000 face value bonds. 2. Under plan II the interest would be $10,125 with 1,400 shares of common stock outstanding. If the indifference point is $25,000 and the tax rate is 30%, how many shares of common stock are outstanding for plan 1?
1] | Indifference point is that level of EBIT for which, the EPS | ||
is the same under two financing options. Hence, when | |||
is $25,000, the EPS is the same under the two financing | |||
plans. | |||
2] | The Common EPS can be found from details given for | ||
Plan 2. | |||
EPS = Net income/Number of shares = (25000-10125)*(1-30%)/1400 = | $ 7.4375 | ||
3] | The NI under Plan 1 = (25000-100000*8%)*(1-30%) = | $ 11,900 | |
Common stock shares outstanding for Plan 1 = NI/EPS = 11900/7.4375 = | 1600 | shares |