Christmas Ornaments, Inc. is an all-equity firm with a total market value of $37

Question

Christmas Ornaments, Inc. is an all-equity firm with a total market value of $375,000 and 15,000 shares of stock outstanding. Management is considering issuing $75,000 of debt at an interest rate of 8 percent and using the proceeds on a stock repurchase. As an all-equity firm, management believes the earnings before interest and taxes (EBIT) will be $20,000 if the economy is normal, $10,000 if it is in a recession, and $25,000 if the economy booms. Ignore taxes. What will the EPS be if the economy enjoys a boom and the firm maintains its all-equity status? A $2.00 B $0.80 C $1.50 D $1.75

Steps shown please

Explanation / Answer

EBIT in boom = 25,000

Since there is no taxes and interest (as it is an all equity firm), the net profit = 25,000

So EPS = Net profit/ Number of shares

No. of shares = 25,000 since there is no debt issued and no repurhcase

EPS25,000/15,000 = 1.67

EPS = 1.67 (which is not given in the options)

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