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Quote:
Mathematically, the indifference pt b/w Debt and common stock is, EBIT * -920,000/800,000 = EBIT *-360,000/1,050,000 EBIT*250,000 = Rs. 966,000,000-288,000,000 EBIT= Rs. 2712 Note that for the debt alternative, the total before tax interest is rs. 920,000 (360,000+560,000), and this is the intercept on the horizontal axis. for pref. alternative , divide 480,000 by (1-.40) to get 800,000. when this is dded to 360,000 interest on existing debt , the intercept becomes 1,160,000. ------------------------------------------------------------- iii) For the current EBIT level, com. stock is clearly preferable. EBIT would need to increse by Rs. 2712,000-1500,000 = 1212,000 before an indiffernce pt whr debt is reached. stronger case, no doubt, can be made for the debt as EBIT will not probably fall below the indif. pt. All the other things remain same. -------------- Solved. |
#12
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that's great to mention here
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Beauty (Saturday, July 30, 2016) |
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