Company B is currently all-equity financed with an EBIT of 45 million per year and generating 15%return per year for the shareholders. Now, the company is considering taking on a new project thatcosts 80 million to start. Once taken, the project will increase Company B’s EBIT by 20 million per year.The tax rate always remains at 40%. The company currently has 20 million shares and can either raise80 million from a VC or borrow 80 million from a bank.a. If the project is financed with equity, the VC asks for 45% of the unlevered equity. What will be theearnings per share (EPS) and the P/E ratio after taking the project?b. If the project is financed with debt, the bank demands 10% interest plus 10 million principalrepayments per year until the loan is paid off. What will be the earnings per share (EPS) and the P/Eratio after taking the project?

Company B is currently all-equity financed with an EBIT of 45 million per year and generating 15%return per year for the shareholders. Now, the company is considering taking on a new project thatcosts 80 million to start. Once taken, the project will increase Company B’s EBIT by 20 million per year.The tax rate always remains at 40%. The company currently has 20 million shares and can either raise80 million from a VC or borrow 80 million from a bank.a. If the project is financed with equity, the VC asks for 45% of the unlevered equity. What will be theearnings per share (EPS) and the P/E ratio after taking the project?b. If the project is financed with debt, the bank demands 10% interest plus 10 million principalrepayments per year until the loan is paid off. What will be the earnings per share (EPS) and the P/Eratio after taking the project?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter4: Financial Planning And Forecasting

Section: Chapter Questions

Problem 6P

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