Question

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?

Answer 1

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.