Question

Consider a firm with an EBITDA of $2,600,000 and an EBIT of $1,015.000. The firm finances its assets with $4.630.000 debt (costing 75 percent, all of which is tax deductible) and 215,000 shares of stock selling at $15 per share. To reduce risk associated with this financial leverage, the firm is considering reducing its debt by $2,730.000 by selling additional 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 $1,015,000 Calculate the EPS before and after the change in capital structure and indicate changes in EPS. (Do not round Intermediate calculations. Round your answers to 2 decimal places.) EPS before EPS after Changes in debt

Answer 1

Capital Stanture - After Change in Debt reduction by by selling additional at market price . No of shares $ 27, 30,000. shares of stock @ $ 15 per share. raised = 2730000 15 182000 .. Total No. of shares - 215000 + 182000 2 397000 EBIT lol 5600 A Interest - (142500) (4630060-273086075%. EBT 872500 tan @ 21%. (183225) 689275 EAT EPS - 689275 397000 - 1.4 from $ 46,30,000 Debt to has reduced $ 19,00,000.

As per the question – 7.5%. Debt - $ 46,30,000. 215000 shares @ $ 15 per share tax rate – 21%. Before Capital Structure Change - EBIT = 10, 15,000 (-) Interest - (347250) (705% of 4630000) – EBT 667750 - tane @ 211 (133550) EAT $534200 EPS - EAT no. & shares outstanding 534200 215000 $2.48 per share.