Question

Consider a firm with an EBITDA of $14,800,000 and an EBIT of $11,400,000. The firm finances its assets with $51,800,000 debt (costing 7.4 percent) and 10,900,000 shares of stock selling at $8.00 per share. The firm is considering increasing its debt by $25,000,000, using the proceeds to buy back 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 $11,400,000. Calculate the EPS before and after the change in capital structure and indicate changes in EPS. (Round your answers to 3 decimal places.)

EPS Before:

EPS After:

Changes in EPS:

Answer 1

Answer:

Working:

Before change:

Number of shares = 10,900,000

Debt = $51,800,000

Change:

Increase in debt = $25,000,000

Number of shares bough back = 25000000 / $8 =3,125,000

After change:

Number of shares = 10,900,000 - 3125000 = 7,775,000

Debt = $51,800,000 + $25,000,000 = $76,800,000

Above excel with 'show formula' is as below: