Question

Summer Tan, Inc., is an all-equity firm with a total market value of $685,000 and 44,900 shares of stock outstanding. Management believes the earnings before interest and taxes (EBIT) will be $91,800 if the economy is normal. If there is a recession, EBIT will be 10 percent lower, and if there is a boom, EBIT will be 20 percent higher. The tax rate is 40 percent. What is the EPS in a boom

Answer 1

The EPS under Boom is $1.472 per share.

Step-by-step explanation:

The earnings per share is the value of earnings over the number of shares outstanding or the per share earnings. The formula for earnings per share is,

EPS = Net income / No of outstanding common shares

Where,

The Net Income for an all equity based firm is = EBIT - tax

The EBIT under boom will be = 91800 * 1.2 = $110160

The net income will be = 110160 - (110160 * 40%) = $66096

Earnings per Share in Boom = 66096 / 44900

Earnings per share in Boom = 1.472 per share