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Fortis Ltd. is currently an all equity firm with a total market value of $28,400,000 with 1,200,000 shares of stock outs...

Fortis Ltd. is currently an all equity firm with a total market value of $28,400,000 with 1,200,000 shares of stock outstanding. The firm has expected EBIT of $1,660,000 if the economy is normal and $2,750,000 if the economy booms. The firm is considering a $6,800,000 bond issue with an attached interest rate of 5 percent. The bond proceeds will be used to repurchase shares. Ignore taxes. What will the earnings per share be after the repurchase if the economy booms?

$2.36

$2.50

$2.73

$2.87

$2.64
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Answer #1

Stock Price = 28,400,000 / 1,200,000 = $23.67

No. of shares repurchased = 6,800,000 / 23.67 = 287, 324

Outstanding shares = 1,200,000 - 287,324 = 912,676

Net Income = EBIT - Debt x Interest rate = 2,750,000 - 28,400,000 x 5% = 2,410,000

=> EPS = 2,410,000 / 912,676 = $2.64

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