Question

Consider a firm with an EBIT of $864,000. The firm finances its assets with $2,640,000 debt (costing 7.8 percent and is all tax deductible) and 540,000 shares of stock selling at $5.00 per share. To reduce the firm's risk associated with this financial leverage, the firm is considering reducing its debt by $1,000,000 by selling an additional 340,000 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 $864,000. Calculate the change in the firm's EPS from this change in capital structure. (Do not round intermediate calculations and round your final answers to 2 decimal places.) EPS before: EPS after: Difference:

I know the reps before is .96 but I need help with the after and difference.

Answer 1

solutt Given data from the above question. consider a from with an EBIT of 864,000. The from finances its assets with $2,640,000 debt. costing 7-8 percent And 54,000 shares of stock selling at $5.00pes share considering reducing its debt by $1,000,000 by selling an additional 340,000 shares of stock. 1) Calculation of Eps before change in caprtal structure EBIT = $ $64,000 Interest in debit = $21640,000 X 7-8% Interest on debt = $205,920 EBT = EBIT - Interest - $ 864,000-$205,920 1. EBT = $ 658,080 Now, "EPO = (EBIT - Tar) / number of equity shareholdes 48655,080–197,424)/5401600 = $0.853 a EPS = $0.8531

2) Calculation of Eps after change in capital structure: Now! EPS - (EBIT-Interest - Tam) Number of equity shares Now, =($8641000 – $127,920 – $220,824) 8801000 LES =$0.585 Ti Eps = $0.5857 Finally, chong in EP 3 = 0.585-0-853 = -0-268 chang in Eps is 20-268]