A company with a share price of $49 has shares outstanding of 5 million and net...
A company with a share price of $49 has shares outstanding of 5 million and net income of $20 million. The company conducts a leverage recapitalization to alter its capital structure by borrowing $3 million and using the proceeds to buy back shares. The pre-tax cost of debt is 6% and the company's tax rate is 29%.
What will be the new earnings per share after the leverage recapitalization?
Enter your answer rounded to two decimals.
Homework Answers
first of all lets find out the profit before tax = 20 Million/(1-29%)
= 28169014.08451
Interest on Loan = 3000000*6% = 180000
Profit Before tax = 28169014.08451-180000 = 27989014.08
Profit After Tax = 27989014.08*(1-0.29) = 19872200
EPS =19872200/5000000 = $ 3.97 per share.
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