Consider a firm with an EBIT of $869,000. The firm finances its assets with $2,6
ID: 2825851 • Letter: C
Question
Consider a firm with an EBIT of $869,000. The firm finances its assets with $2,690,000 debt (costing 8.3 percent) and 590,000 shares of stock selling at $5.00 per share. To reduce the firm’s risk associated with this financial leverage, the firm is considering reducing its debt by $1,000,000 by selling an additional 390,000 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 $869,000.
Calculate the EPS before and after the change in capital structure and indicate changes in EPS. (Negative answer should be indicated by a minus sign. Round your answers to 5 decimal places.)
Consider a firm with an EBIT of $869,000. The firm finances its assets with $2,690,000 debt (costing 8.3 percent) and 590,000 shares of stock selling at $5.00 per share. To reduce the firm’s risk associated with this financial leverage, the firm is considering reducing its debt by $1,000,000 by selling an additional 390,000 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 $869,000.
Explanation / Answer
EPS Before change in Capital Structure.
EPS after capital structure changes
EPS before = 0.6566
EPS after = 0.4461
Difference = 0.2105
EBIT 869000 Less: Interest (2690000x8.3%) 223270 645730 Less: Tax @ 40% 258292 Earnings available to shareholders 387438 No. Shares 590000 EPS 0.6566 / Share (387438/590000)Related Questions
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