Calculate the change in the firm's EPS from this change in capital structure. Note: Round your answers to 2 decimal places. EPS before EPS after Difference

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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Vijay 

Consider a firm with an EBIT of $554,000. The firm finances its assets with $1,040,000 debt (costing 5.9 percent and is all tax
deductible) and 204,000 shares of stock selling at $15.00 per share. The firm is considering increasing its debt by $900,000,
using the proceeds to buy back 79,000 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 $554,000.
Calculate the change in the firm's EPS from this change in capital structure.
Note: Round your answers to 2 decimal places.
EPS before
EPS after
Difference
Transcribed Image Text:Consider a firm with an EBIT of $554,000. The firm finances its assets with $1,040,000 debt (costing 5.9 percent and is all tax deductible) and 204,000 shares of stock selling at $15.00 per share. The firm is considering increasing its debt by $900,000, using the proceeds to buy back 79,000 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 $554,000. Calculate the change in the firm's EPS from this change in capital structure. Note: Round your answers to 2 decimal places. EPS before EPS after Difference
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