Answer to Question #88421 in Accounting for charl ramoga

Question #88421

Sheen Ltd manufactures garden tools and has decided to expand operations. The new
operations are expected to increase EBIT from the current level of $500 000 to $1 million p.a.
Sheen has a capital structure that utilizes bonds, ordinary equity, and preference shares. The
$500 000 of issued bonds pay 6% p.a. Preference shares pay an annual fixed dividend of $70
000. The company has 1 000 000 ordinary shares that are trading at $5.1 per share. The
Australian corporate tax rate is 30%. Most of the shareholders of Sheen live outside Australia
and cannot fully utilize dividend imputation credits?

Expert's answer

If the company can issue new shares at the current market price, then EPS will decrease as a result of new shares issued to fund the centre.