Zheng Sen s chinese take out had earnings before interest and taxes of 4 000 000 last year. The

QUESTION

Zheng Sens chinese take out had earnings before interest and taxes of 4,000,000 last year. The firm has a marginal tax rate of 40% and currently has the following capital structure: Long term debt at 12% with an amount of 8,000,000 and total capital percentage of 25% Preferred stock at 14% with an amount of 800,000 and total capital percentage of 25% Common stock equity 2000000 shares outstanding for an amount of 16,000,000 and tot cap percentage of 50 Questions: a. Calculate the firms after tax ROE and EPS. b. If the firm retires 4,000,000 of preferred stock using the proceeds from an equal increase in long term debt, what would have been the after tax ROE and EPS c. If the firm retires 4,000,000 of preferred stock using the proceeds from the sale of 500,000 shares of common stock, what would have been the after tax ROE and EPS
Answer to part A Earnings before interest and taxes 4,000,000 less: Interest 960,000 Earnings before taxes 3,040,000 less: taxes @ 40% 1,216,000 Earnings after taxes 1,824,000 Return on Equity = Earnings after taxes/Common Equity *100 Earnings after taxes 1,824,000 Common Equity 16,000,000 Return on Equity 11.40% Earnings per share= Earnings after taxes/Number of shares Earnings after taxes 1,824,000 Number of shares 2,000,000 Earnings per share 0.91 Calculation of Interest Long term debt 8,000,000 Rate of Interest 12% Interest Amount 960,000 Answer to part B Earnings before interest and taxes 4,000,000 less: Interest 1,440,000 Earnings before taxes 2,560,000 less: taxes @ 40% 1,024,000 Earnings after taxes 1,536,000 Return on Equity = Earnings after taxes/Common Equity *100 Earnings after taxes 1,536,000 Common Equity 16,000,000 Return on Equity 9.60% Earnings per share= Earnings after taxes/Number of shares Earnings after taxes 1,536,000 Number of shares 2,000,000 Earnings

per share 0.77 Calculation of Interest Long term debt 12,000,000 Rate of Interest 12% Interest Amount 1,440,000 Answer to part C Earnings before interest and taxes 4,000,000 less: Interest 960,000 Earnings before taxes 3,040,000 less: taxes @ 40% 1,216,000 Earnings after taxes 1,824,000 Return on Equity = Earnings after taxes/Common Equity *100 Earnings after taxes 1,824,000 Common Equity 12,000,000 Return on Equity 15.20% Earnings per share= Earnings after taxes/Number of shares Earnings after taxes 1,824,000 Number of shares 1,500,000 Earnings per share 1.22 Calculation of Interest Long term debt 8,000,000 Rate of Interest 12% Interest Amount 960,000

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