Question

Create a chart that captures the EPS for each scenario by financing option. What conclusions can you draw from your chart about the changes on EPS based on the following changes in:

Interest rate

Corporate rate

Stock price

Input Data Amount of capital needed EBIT Interest Rate Tax Rate Stock Price #Shares outstandin The Number $75 million 15 million 6 percent 35 percent S50 250 million 50/50 Debt/Stk 100% Debt | 100% Stock SEBIT SINTEREST 4,500,000 SEBT STAXES SEAT #SHARES | 250,000,000 | 251 SEPS 15,000,00015,000,00015,000,000 2,250,000 50,000 4,462,500 8,287,500 10,500,00015,000,00012,7 3,675,0005,250,000 6,825,0009,750,000 ,500,000250,750,000 0.03876740.033050847 0.0273

Answer 1

EPS (earning pershare ), is simply calculated by dividing earning after payment of interest and tax by number sahres in company .

EPS=

the equation , clearly indicates any or all factors , which impact either EAT of No of shares have direct impact on EPS.

EPS $\alpha$ EAT ---------------------------(a)

EPS $\alpha$ 1/ No of shares -------------------(b)

EAT = EBIT - interest - Tax

NO of share = Capital / stock price

Analysis of factors in question

1. Interest rate : increase in interest will reduce the value of EAT , which will have negative impact on EPS

2. Corporate Tax Rate: Any increase in tax rate will reduce the value of EAT , which will have negative impact on EPS.

3. Stock Price :Any increase in stock price will reduce the value of number of shares , which will have positive impact on EPS