Question

In the following example, the proposed debt issue would raise $4,000,000; the interest rate would be 10%. In addition, the EBIT would be $2,000,000. What would be the increase in the Earnings Per Share (EPS) from to current to the proposed structure

Answer 1

$1.67

Step-by-step explanation:

The computation of the increase in earning per share is shown below:

But before that first we need to find out the current and proposed earning

per share

Particulars Current Proposed

Number of shares $400,000 $240,000 (a)

EBIT $2,000,000 $2,000,000

Less:

Interest $400,000

($4,000,000 ×0.10)

EBT $2,000,000 $1,600,000

Less

Taxes $0 $0

Net income $2,000,000 $1,600,000 (b)

EPS $5 $6.67 (a ÷ b)

Increase in EPS

= $6.67 - $5

= $1.67