Question

Consider a firm with an EBIT of $11,400,000. The firm finances its assets with $51,800,000 debt (costing 7.4 percent) and 10,900,000 shares of stock selling at $8.00 per share. The firm is considering increasing its debt by $25,000,000, using the proceeds to buy back shares of stock. The firm is in the 30 percent tax bracket. The change in capital structure will have no effect on the operations of the firm. Thus, EBIT will remain at $11,400,000. Calculate the EPS before and after the change in capital structure and indicate changes in EPS. (Round your answers to 3 decimal places.)

Answer 1

EPS Before the change in capital structure = $0.486 Per shares

EPS After the change in capital structure = $0.515 Per shares

Difference = $ 0.029

Step-by-step explanation:

Calculation of EPS before the change in capital structure :

Particulars Amount

EBIT $ 11,400,000

Interest Cost $ 3,833,200 (51,800,000×7.4%)

Earning After Interest $ 7,566,800

Tax ( 30% ) $ 2,270,040

Net Profit after tax $ 5,296,760

Number of Shares outstanding $ 10,900,000

Earning Per Shares $0.486

Calculation of EPS after the change in capital structure :

Particulars Amount

EBIT $ 11,400,000

Interest Cost $ 5,683,200

( $ 76,800,000×7.4%)

Earning After Interest $ 5,716,800

Tax ( 30%) $ 1,715,040

Net Profit after tax $40,01,760

Number of Shares outstanding 77,75,000

Earning Per Shares $0.515

∴ we get

EPS Before the change in capital structure = $0.486 Per shares

EPS After the change in capital structure = $0.515 Per shares

Difference = $ 0.486 - 0.515 = $ 0.029