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Solution
Item
Plan 1 (all equity)
Plan 2 (debt –equity)
EBIT (20%)
5,000,000
5,000,000
Less INTEREST (12%)
0
2,250,000
Profit before tax
5,000,000
2,750,000
Less Taxes (30%)
1,500,000
825,000
Profit after taxes (PAT)
3,500,000
1,925,000
EPS = PAT/No of shares or ROE=PAT/Equity
3.5
14%
7.7
30.8%
Conclusion
Plan 2 has higher returns
ITS = 30% * 18,750,000 = 5,620,500
Carolinemakenamutwiri answered the question on December 14, 2018 at 11:11
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