Finance Homework Wk 1 assignment - Leahy Bread Company

FINANCING (DEBT-EQUITY) DECISION Leahy Bread Company
Inputs:
External Financing Needed 3,92,675 from forecast
Existing Common Shares 7,500 from company info
Existing Long-Term Debt 3,00,000 from most recent historical balance sheet
Interest Rate on Existing Debt 7.0% from company info
Interest Rate on New Debt 9.0% given
Boom EBIT 3,00,000 arbitrarily above optimistic forecast
Bust EBIT 50,000 arbitrarily below pessimistic forecast
Income Tax Rate 35.0% from income statement
Share Price $100.00 from market info
Equity 5,28,741 from most recent historical balance sheet

Results: IF DEBT IS USED IF EQUITY IS USED
BOOM BUST BOOM BUST
EBIT 3,00,000 50,000 3,00,000 50,000
Interest expense - old -21,000 -21,000 -21,000 -21,000
Interest expense - new -35,341 -35,341 0 0
Profit before tax 2,43,659 -6,341 2,79,000 29,000
Income tax -85,281 2,219 -97,650 -10,150
Net profit 1,58,379 -4,121 1,81,350 18,850
Shares 7,500 7,500 7,500 7,500
Shares - new 0 0 3,927 3,927
Earnings per share $21.12 $(0.55) $15.87 $1.65
Coverage ratio 5.3 0.9 14.3 2.4

















EBIT 50000 300000
debt EPS ($0.55) $21.12
equity EPS $1.65 $15.87


Indifference point calculation:
Debt Equity
Common shares 7,500 11,427
Income tax rate 35.0% 35.0%
Interest expense 56,341 21,000

EBIT 1,23,841 1,23,841 Indifference EBIT
Interest expense 56,341 21,000
EBT 67,500 1,02,841
Income tax 23,625 35,994
EAT 43,875 66,846
EPS $5.85 $5.85 Indifference EPS


Debt capacity calculation:
Bust Boom Indiff.
EBIT 50,000 3,00,000 1,23,841
Interest coverage ratio per rating 5.9 5.9 5.9 BBB rating chosen
AVAILABLE FOR INTEREST 8,475 50,847 20,990
Interest rate 9.0% 9.0% 9.0% Credit rating AAA AA
DEBT CAPACITY 94,162 5,64,972 2,33,222 Interest coverage ratio 27.3 18
Existing debt 3,00,000 3,00,000 3,00,000 Debt ratio - approximate 12.6% 36.1%
EXCESS DEBT CAPACITY -2,05,838 2,64,972 -66,778



Q1-Explain how the EBIT Chart works (inputs determining the outputs-the two lines on the chart
and the indifference point) in YOUR OWN WORDS.  

Q2-Page 112 of the Cohen Finance Workbook shows LBCs forecast. Discuss the range of likely EBITs and relate them to the indifference EBIT - in your opinion, will future EBIT be lower than or higher than indifference EBIT?

Q3-Explain the meaning of the debt capacity calculation at row 62. 
 
Q4-Recommend either debt or equity for the $392,675 financing and explain your reasoning.
Frame your answer using the FRICTO framework, p 119 in the Cohen Finance Workbook, citing specifics from the analysis.