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A company wishes to raise additionaldebtfinance and isassessingthe impact thiswill have on key ratios.
The following data currently applies:
* Profit before interest and tax for the current yearis $500,000
* Long term debt of $300,000 at a fixed interest rate of 5%
* 250,000 sharesin issuewith a share price of $8
The companyplansto borrow an additional $200,000 on the first day of the yearto invest in new project whichwillimprove annualprofit before interest and tax by $24,000.
The additionaldebtwould carry an interest rate of 3%.
Assume the number of shares in issue remain constant but theshare price will increase to $8.50 after the investment.
Therate of corporate income tax is 30%.
After the investment, which of the following statements is correct?