Final answer:
The EPS after Cross Town Cookies issues $167,000 of debt at a 7% interest rate and repurchases shares is $1.50, which is calculated by deducting interest expenses from EBIT, determining the number of shares repurchased, and dividing the net income by the remaining outstanding shares. Therefore correct option is A
Step-by-step explanation:
The question asks about calculating the earnings per share (EPS) after Cross Town Cookies issues debt to repurchase shares. We have the total EBIT ($65,000) and need to account for the new interest expenses due to the $167,000 debt issued at a 7% interest rate.
First, we calculate the interest expense: $167,000 × 7% = $11,690.
We subtract the interest expense from EBIT to get the net income, which is $65,000 - $11,690 = $53,310.
Next, we find out how many shares will be repurchased: at the firm's market value of $730,000 and 46,000 shares outstanding, each share is worth $730,000 / 46,000 = $15.87.
With $167,000, the firm can buy back $167,000 / $15.87 = 10,522 shares approximately.
After the repurchase, the total shares outstanding would be 46,000 - 10,522 = 35,478 shares.
Finally, we calculate the EPS by dividing net income by the remaining shares: $53,310 / 35,478 = $1.50.
Hence, the EPS if the debt is issued would be $1.50.