Capital Structure Management

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Capital Structure Management
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Problem 1

• Existing I 0 S0
• Plan A (Equity) sell 1,200,000 shares at 10
  per share (12 million total)
• Plan B (levered) issue 3.5 million in 9 debt
  and sell 850,000shares at 10 per share
  (12 million total)

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Problem 1

• Stock Financing Levered Financing
• (EBIT-I) (1-t) - P (EBIT-I) (1-t) - P
• S
  S
• (EBIT-0) (1-.50) (EBIT-315,000)(1-.50)
• 1,200,000 850,000
• EBIT 1,080,000

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Problem 1
Stock Levered

• EBIT 1,080,000 1,080,000
• I 0 (315,000)
• EBT 1,080,000 765,000
• Tax (540,000) (382,500)
• NI 540,000 382,500
• Shares 1,200,000 850,000
• EPS .45 .45

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1b) Breakeven EBIT
levered financing
stock financing
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1c) Breakeven EBIT
For EBIT up to 1.08 m, stock financing is best.
levered financing
stock financing
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1c) Breakeven EBIT
For EBIT up to 1.08 m, stock financing is best.
levered financing
stock financing
For EBIT greater than 1.08 m, the levered plan
is best.
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Vista Products
Problem 2

• Existing I 220,000 S320,000
• Plan A (Equity) sell 200,000 shares at 25 per
  share (5 million total)
• Plan B (Debt) issue 5 million in 8 debt

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Problem 2

• Stock Financing Debt Financing
• (EBIT-I) (1-t) - P (EBIT-I) (1-t) - P
• S
  S
• (EBIT-220,000) (.65) (EBIT-620,000)(.65)
• 520,000
  320,000
• .208 EBIT - 45,760 .338 EBIT - 209,560
• EBIT 1,260,000

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2b) Breakeven EBIT
debt financing
stock financing
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2c) Breakeven EBIT
For EBIT up to 1.26 m, stock financing is best.
debt financing
stock financing
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2c) Breakeven EBIT
For EBIT up to 1.26 m, stock financing is best.
debt financing
stock financing
For EBIT greater than 1.26 m, the debt plan
is best.
13
Vista Products
Problem 3

• Existing I 220,000 S320,000
• Plan A (Equity) sell 400,000 shares at 25 per
  share (10 million total)
• Plan B (Levered) issue 5 million in 8 debt,
  and sell 200,000 shares at 25 per share (10
  million total)

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Problem 3

• Stock Financing Debt Financing
• (EBIT-I) (1-t) - P (EBIT-I) (1-t) - P
• S
  S
• (EBIT-220,000) (.65) (EBIT-620,000)(.65)
• 720,000
  520,000
• .338 EBIT - 74,360 .468 EBIT - 290,160
• EBIT 1,660,000

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3b) Breakeven EBIT
debt financing
stock financing
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3c) Breakeven EBIT
For EBIT up to 1.66 m, stock financing is best.
debt financing
stock financing
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3c) Breakeven EBIT
For EBIT up to 1.66 m, stock financing is best.
debt financing
stock financing
For EBIT greater than 1.66 m, the debt plan
is best.