Holly\'s is currently an all equity firm that has 9,000 shares of stock outstand
ID: 2716849 • Letter: H
Question
Holly's is currently an all equity firm that has 9,000 shares of stock outstanding at a market price of $45 a share. The firm has decided to leverage its operations by issuing $120,000 of debt at an interest rate of 9.5 percent. This new debt will be used to repurchase shares of the outstanding stock. The restructuring is expected to increase the earnings per share. What is the minimum level of earnings before interest and taxes that the firm is expecting? Ignore taxes.
A. $38,475 B. $40,516 C. $42,000 D. $44,141 E. $45,020
which letter is the correct answer?
Explanation / Answer
A. $35, 910
EBIT/9,000 = [EBIT - ($120,000 x .095)]/[9000 - ($120,000/$42) = $35,910
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