Question

Consider a firm with an EBITDA of $14,600,000 and an EBIT of $11,300,000. The firm finances its assets with $51,600,000 debt (costing 7.3 percent) and 10,800,000 shares of stock selling at $8.00 per share. The firm is considering increasing its debt by $25,800,000, 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 $11,300,000.

Answer 1

The firm is considering increasing its debt and using the proceeds to buy back shares of stock. The new Earnings Before Taxes (EBT) and Net Income are calculated based on the change in capital structure.

Step-by-step explanation:

The firm is considering increasing its debt by $25,800,000 and using the proceeds to buy back shares of stock. The firm's tax rate is 21%. The change in capital structure will have no effect on the operations of the firm, so EBIT will remain at $11,300,000.

To calculate the new Earnings Before Taxes (EBT), we subtract the interest expense from the EBIT. The interest expense is calculated as the new debt multiplied by the cost of debt (7.3%): $25,800,000 x 0.073 = $1,881,400.

The new EBT is then $11,300,000 - $1,881,400 = $9,418,600. Taking into account the tax rate of 21%, the Net Income will be $9,418,600 x (1 - 0.21) = $7,442,454.