Question

Assume an unlevered firm has total assets of $6,000, earnings before interest and taxes of $600, and 500 shares of stock outstanding. Further assume the firm decides to change 40 percent of its capital structure to debt with an interest rate of 8 percent. Ignore taxes. What will be the amount of the change in the earnings per share as a result of this change in the capital structure?

Answer 1

The amount of the change in the earnings per share as a result of this change in the capital structure will be $0.16

Step-by-step explanation:

all equity equity and debt

expected EBIT $600 $600

interest (-) ($192)

profit before tax $600 $408

tax (-) (-)

earnings to equity share holders $600 $408

number of equity sahes 500 300

earnings per share $1.20 $1.36

change in the earnings per share = $1.36 - $1.20

= $0.16

Therefore, The amount of the change in the earnings per share as a result of this change in the capital structure will be $0.16