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Hello 🙂
Q;A company currently has 1000 ordinary shares in issue and no debt..It has the choice of raising an additional $100000 by issuing 9% Long term Debt or issuing 500 ordinary shares.The company has 40% Tax rate..
What level of Gearing before interest and tax would result in the same earning /share for the two financing options??
Sir i totally stuck in this question as from where i start work out on this question
Also the ans is given just random figures…If Q given the current EPS then i am able to work backward.But currently dont understand how i start work on it
Plz explain it if possible..
Really Thanks 🙂
The question as it is written makes no sense – there are only two possible levels of gearing depending on whether they issue shares or whether they issue debt.
Also it is very odd to ask for ‘gearing before interest and tax’ – that does not mean anything.
I think the question was meaning to ask “what level of earnings before interest and tax would result in the same earnings per share for the two financing options” and that there is a typing error in the question.
Are you sure that it is not you that misread, and that it actually asked for the level of earnings (rather than the level of gearing)?
Sir there is no Typing error in book..actually there is error in myself i type it wrong here..
And i really feel shame to tell you the truth..
Thatswhy i told you i am going to ignore..And yes.you are right question said earnings before intrest and tax..Not gearing before int and tax.
Sorry..
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