Consider a firm with an EBIT of $11,700,000. The firm finances its assets with $

Question

Consider a firm with an EBIT of $11,700,000. The firm finances its assets with $52,400,000 debt (costing 7.2 percent) and 11,200,000 shares of stock selling at $6.00 per share. The fim is considering increasing its debt by $26,100,00o, using the proceeds to buy back shares of stock. The firm is in the 40 percent tax bracket. The change in capital structure will have no effect on the operations of the firm. Thus, EBIT will remain at $11,700,000. Calculate the EPS before and after the change in capital structure and indicate changes in EPS. (Round your answers to 3 decimal places.) EPS before EPS after Difference

Explanation / Answer

EPS before:

EBIT 11700000

(-)Interest 52400000*7%=3668000

EBT 8032000

(-)Taxes 8032000*40%=3212800

Net Income 4819200

EPS 4891200/11200000=0.430286

EPS after:

EBIT 11700000

(-)Interest (52400000+26100000)*7%=5495000

EBT 6205000

(-)Taxes 6205000*40%=2482000

Net Income 3723000

EPS 3723000/(11200000-26100000/6)=0.5435

Difference=0.5435-0.430286=0.113214

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