EBIT-EPS ANALYSIS

Current Proposed
Assets 20000 20000
Debt 0 10000
Equity 20000 10000
Debt 0 1
Int n/a 8%
Shares 400 200

PLAN1 Debt = 0 Shares outstanding = 400

Recession Normal
EBIT 1000 2000
interest 0 0
Net Income 1000 2000
Eps 2.5 7
ROA 5% 10%
ROE 5% 10%

PLAN1 Debt = 0 Shares outstanding = 200

Recession Normal
EBIT 1000 2000
interest 800 800
Net Income 200 1200
Eps 1 6
ROA 5% 10%
ROE 2% 12%
Use this to buy the equity worth 10,000

Expansion
3000
0 Range of Return 5 to 15 10
3000
7.5
15% 5% Net income / Assets Sir has used EBIT instead of Net Income
15% 5% Net Income / Equity

Expansion
3000
800
2200
7.5
15%
15%
tead of Net Income
 Rabbit Tiger
Equity Equity and debt
10
EBIT 2.4 2.4
Tax 40% 40%
kd 0% 7%
CostofEquity 10% 10%

Value of Rabbit 24 24 24
EBIT/Kd

EBIT Kd Ku D
2.4 7% 10% 10.00
Rabbit
1.44 14.4 Wacc 10.000000000000000%

Tiger Wacc
18.4 Ke 25.000000000000000% 13.70%

if debt 20
Wacc 6.4286%
VL 22.4
20

24
 L U
Ebit 18 18
D 65.00 0
Int 5.20 0 Unlevered Levered
Ebt 12.80 18 Stake 1% Stake 1%
E 186.2 269.8 Invest 269.8 Debt 0.65
D+E 251.20 269.80 2.698 Equity 1.862
CS 1.9 3.8 $ return 0.18 Total 2.512
Stock price 98 71
$ ret 0.128
$ debt 0.052
total 0.18
 Current Proposed
Assets 8000 8000
Debt 0 4000 NO DEBT
Equity 8000 4000 Recession Expected
Interest Rate 10% 10% ROA 5% 15%
Market Value 20 20 Earnings 400 1200
Shares Outstanding 400 200 Return on Equity 5% 15%
EPS 1 3

DEBT = 4000
Recession Expected
Return on Assets 5% 15%
EBI 400 1200
Interest 400 400
Earnings After Interest 0 800
ROE 0 0.2
EPS 0 4
Expansion
25% Earnings/Assets
2000 Earnings/Shares Outstanding
25% Earnings/Equity
5

Expansion
25%
2000
400
1600
0.4
8
Q1

Market Value: 245000

EBIT N 19000
EBIT S 23750
EBIT R 11400
DEBT 58800
Interest 8%
Shares 5000
Stock Price 49

Q2

Market Value: 245000

EBIT N 19000
EBIT S 23750
EBIT R 11400
DEBT 58800
Interest 8%
Shares 5000
Stock Price 49

Q3 M/B Ratio
A) EBIT
Recession 19000
Normal 23750
Expansion 11400

B) EBIT
Recession 19000
Normal 23750
Expansion 11400

C) EBIT
Recession 19000
Normal 23750
Expansion 11400

C) EBIT
Recession 19000
Normal 23750
Expansion 11400

Q4
A)
Plan I
Stocks 365000
Debt 0
Interest 0
Tax 0
EBIT 1250000
Interest 0
EBT 1250000
EPS 3.42465753424658

Q5
A)
Plan I
Stocks 365000
Debt 0
Interest 0
Tax 0
Price Per Share 38
Firm Value 13870000

Q6
A) PLAN 1
Stocks 3500
Debt 37440
Interest 10%
Tax 0%
EBIT 14800
EBT 11056
EPS 3.15885714285714
Price 41.6
B)
USE EBIT OF levered firm is Equal to EBIT of Unlevered Firm

Q8
A)
EBIT 43600
Shares 5000
EPS 8.72
No. of Shares held by MS. Brown 100
Total Cash flow 872

B)
EBIT 43600
Debt 35%
Debt Value 85750
No. of buy Back shares 1750
Interest Expenses 6002.5
EBT 37597.5
Outstanding Shares 3250
EPS 11.5684615384615
Total Cash Flow Now 1156.84615384615

C)
No. of shares to Be Sold 35
New Shares 65
Dividend 751.95
Interest To Be Received 120.05
Total CF 872

Q9 EBIT
A) 61000
Rate of Return 0.145925925925926
Interest 21600
EBT 39400
Proportion of Dividends 4377.77777777778

B)

To generate the same cash flow in the ABC co., the shareholder i.e. Richard needs to match the capital structure of ABC co. To
this, Richard needs to sell off all his shares in XYZ co. This will give him a net amount of $30,000. Richard should then borrow
$30,000. This $30,000 loan, will however, create an interest cash flow of:-

-2400 Cash OutFlow

6777.77777777778 Dividends Received
4377.77777777778 Total CashFow

C) Cost of Equity Template

Re Lev Equity
Ra Unlev Equity
Rd Debt
D Debt
E Equity
Cost of Equity XYZ 14.5926%
Cost of Equity ABC 11.2963%

D)
V Total Value
E Equity Capital
Re Cost of Equity
D Debt Capital
Rd Cost of Debt
T Tax Rate

WACC ABC 0.112962962962963

Q10

WACC 8.60%
Debt 0
MV Equity 37000000
Taxes 0
37000000 37000000

Q11
WACC
Debt 0
MV equity 37000000
Taxes 23%
EBIT 4132467.53246753

Q12
D/E Ratio 1.5
WACC 9.80%
Cost of Debt 6%
Tax 21%
Cost of Equity 17.390%
Weight of Debt 0.6
Weight of Equity 0.4
Cost of Equity 17.3900%
Unlevered Cost of Equity Capital 11.2128%

Q13
Debt 0
Interest 5.80%
WACC 9.10%
Tax 22%

Cost of Equity 9.100%

Debt Weight 0.5

Equity Weight 0.5
Interest 5.80%
WACC 9.10%
Tax 22%
Cost of Equity 11.67%

Debt Weight 0.5

Equity Weight 0.5
Interest 5.80%
WACC 8.10%
Tax 22%
Cost of Equity 11.67%

Q14 & 15
EBIT Forever 163000
Interest 8%
Debt 0
Cost of Equity 15%
Tax 23%
Value of the Firm 836733.333333333

Q16
levered
EBI 18
Debt 65
Cost of debt 8%
Shares Outstanding 1.9
Price of Share 98
Equity 186.2
market value 251.2
Difference 18.6
levered is underpriced…should buy this

Q17
EBIT Perpetual 63000
Tax Rate 21%
Debt 115000
interest 7%
CoC 12%
Unlevered Value 414750
Value of Firm 438900

Q18
EBIT 31480
Debt 0
Cost of Equity 14%
Tax Rate 21%
Current Value 177637.142857143

Interest 8%
Debt 177637.142857143
Value after Recapitalization 37303.80
Value after Recapitalization 214940.94

Vu+ Pv of Tax Shield

Value of Levered 50% Debt
198477.254588986

Equity
Debt 3.1
Interest Rate 8%
Tax Rate 24%
Interest First Year 0.248
Interest Second Year 0.124

Year Interest
I
A
1 0.248
2 0.124

Q20

Alpha
Shares Outstanding 18000
Price 35
Equity 630000
Debt 0
Interest 9%
EBI 93000
Value of Alpha 630000
20% of Each Firm's Equity 126000
NI 93000
Return @ 20% 18600

Q21
Equity 18.5
Debt 7.3
Yield 4%
Expected Return on Portfolio 11%
Beta 1.15
Taxes 0
Debt to Equity Ratio 0.394594594594595
WACC 12.0500%
 N
A) 3.8
25%

B) Interest Expense
Market Price Per Share
Shares Purchased
Total Shares Left
EBIT N
EPS N
EBIT S
EPS S
EBIT R
EPS R

A) Recession
Normal
Expansion

B)
Recession
Normal
Expansion

1
MV of Shares ROE %Change
245000 7.755% 20.000%
245000 9.694%
245000 4.653% -52.000%

Interest EBT ROE

1520 17480 7.13%
1900 21850 8.92%
912 10488 4.28%

Interest EBT EAT

1520 17480 13809.2
1900 21850 17261.5
912 10488 8285.52

Deducting Tax ROE

15010 6.13% -20.0%
 18762.5 7.66%
9006 3.68% -52.00%

B)
Plan II
245000 Stocks
4560000 Debt
10% Interest
0 Tax
1250000 EBIT
456000 Interest
794000 EBT
3.24081632653061 EPS

Plan II
245000
4560000
10%
0

PLAN 2 PLAN 3
2800 4400
66560 0
10% 10%
0% 0
14800 14800
8144 14800
2.90857142857143 3.36363636363636
41.6 Q7

Price of Share 49
Interest 7%
 Equal to before the change was structured

Interest Debt
8% 270000

eeds to match the capital structure of ABC co. To do

mount of $30,000. Richard should then borrow

0.112962962962963 EBIT/Value of Unlevered

8%
270000
270000
 540000 V
540000 E
11.2963% Re
D
8% Rd
0 T

WACC ABC

EBIT
3182000

D/E Ratio 2
WACC 9.80%
Cost of Debt 6%
Tax 21%
Solver Used Cost of Equity 17.390%
Weight of Debt 0.6
Weight of Equity 0.4
Cost of Equity 19.4491%
Unlevered Cost of Equity Capital 11.2128%

Debt Weight 0.25

Equity Weight 0.75
Interest 5.80%
WACC 9.10%
Tax 22%
Cost of Equity 9.96%

Debt Weight 0.25

Equity Weight 0.75
Interest 5.80%
 WACC 8.60%
Tax 22%
Cost of Equity 9.96%

Value After Recapitalization 879283.333333333

Equity 651733.333333333
DEBT
COC 8.0000000%
Weight 22.1097920%
Wacc 14.6440323%

unlevered
18
0
8%
3.8
71
269.8
269.8

erpriced…should buy this

Interest 8%
Debt 88818.5714285714
Value after Recapitalization 18651.90
Value after Recapitalization 196289.04
100% Debt
224857.142857143

Tax Shield PVIF@8%

I*24%
B C D
0.05952 0.93 0.0551111111111111
0.02976 0.86 0.0255144032921811
Increase 0.0806255144032922

Beta

545000
85000
9%
93000
630000 Since no firm pays taxes
109000
85350
17070
S R
4.75 2.28
-40%

4704
49
1200
3800
14296
3.762105263 %Change 0.3322607722
19046 -0.5316172356
5.012105263
6696
1.762105263

21%
EBIT TAX NI EPS
19000 3990 15010 3.002
23750 4987.5 18762.5 3.7525
11400 2394 9006 1.8012

EBIT Interest EBT EAT

19000 4704 14296 11293.84
23750 4704 19046 15046.34
11400 4704 6696 5289.84

20.00%

-52.00%

ROE
5.636% -20.000%
7.046%
3.382% -52.00%
 C)
Plan I Plan II
365000 245000
0 4560000
0 10%
0 0
1750000 1750000
0 456000
1750000 1294000
4.7945205479 5.2816326531

D)
Stocks
Debt
Interest
Tax
EBIT
EBT
NI
EPS
Total Value 540000
Equity Capital 270000
Cost of Equity 14.5926%
Debt Capital 270000
Cost of Debt 8%
Tax Rate 0

0.112962963

D/E Ratio 1
WACC 9.80%
Cost of Debt 6%
Tax 21%
Cost of Equity 17.390%
Weight of Debt 0.6
Weight of Equit 0.4
Cost of Equity 15.3309%
Unlevered Cost o11.2128%
Debt 185000
Equity
16.5299969%
77.8902080%
%Change
-20.000%

-52.000%

EPS %Change
2.258768 -24.94%
3.009268
1.057968 -64.84%
Break Even EBIT
USE EBIT OF levered firm is Equal to EBIT of Unlevered Firm
1387000

PLAN 1 PLAN 2 PLAN 3

3500 2800 4400
37440 66560 0
10% 10% 10%
21% 21% 21%
14800 14800 14800
11056 8144 14800
8734.24 6433.76 11692
2.49549714285714 2.2977714286 2.6572727273
D/E Ratio 0
WACC 9.80%
Cost of Debt 6%
Tax 21%
Cost of Equity 17.390%
Weight of Debt 0.6
Weight of Equi 0.4
Cost of Equity 11.2128%
Unlevered Cost 11.2128%
Q3

Face Value debt 4.5

Unlev V 18.3
Shares 340000
SP 41
MV 13.94
Tax Rate 21% VL= VU+ITS-COFD
DEBT Market V 4.36 FD Cost 0.805
Tax 3.4444

Q6

SC DC
Exp Rec Exp Rec
EBIT 2.7 1.1 2.7 1.1
D 0.9 0.9 1.2 1.1
E 1.8 0.2 1.5 0
Exp E 1.48 1.2
PV E 1.309735 1.061947
Exp D 0.9 1.18
PV D 0.80 1.044248