Question

Consider a firm with an EBITDA of $16,600,000 and an EBIT of $12,300,000. The firm finances its assets with $53,600,000 debt (costing 7.8 percent all of which is tax deductible) and 11,800,000 shares of stock selling at $8.00 per share. The firm is considering increasing its debt by $26,800,000, using the proceeds to buy back shares of stock. The firm's tax rate is 21 percent. The change in capital structure will have no effect on the operations of the firm. Thus, EBIT will remain at $12,300,000. Calculate the EPS before and after the change in capital structure and indicate changes in EPS. Note: For "Change in EPS", note negative changes with a negative sign. Round your answers to 3 decimal places.

Answer 1

To calculate the EPS before and after the change in capital structure, divide the EBIT by the number of shares. Calculate EPS before the change in capital structure using the current number of shares. Calculate EPS after the change in capital structure by subtracting the buyback shares from the original number of shares.

To calculate the EPS before and after the change in capital structure, we need to consider the current debt, shares, and EBIT.

EPS (Earnings Per Share) is calculated by dividing the EBIT (Earnings Before Interest and Taxes) by the number of shares outstanding.

Here are the step-by-step calculations:

1. Calculate the EPS before the change in capital structure:
EPS = EBIT / Number of shares
Number of shares = 11,800,000
EPS before = 12,300,000 / 11,800,000

2. Calculate the EPS after the change in capital structure:
EBIT remains at $12,300,000, but the number of shares changes.
Number of shares after buyback = 11,800,000 - (26,800,000 / $8.00)
EPS after = 12,300,000 / (11,800,000 - (26,800,000 / $8.00))

By substituting the values into the equations and performing the calculations, you can find the EPS before and after the change in capital structure.