Consider a firm with an EBIT of $863,000. The firm finances its assets with $2,630,000 debt (costing 7.7 percent and is all tax deductible) and 530,000 shares of stock selling at $8.00 per share. To reduce the firm's risk associated with this financial leverage, the firm is considering reducing its debt by $1,000,000 by selling an additional 330,000 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 $863,000. Calculate the change in the firm's EPS from this change in capital structure. (Do not round intermediate calculations and round your final answers to 2 decimal places.) EPS before EPS after Difference
Consider a firm with an EBIT of $863,000. The firm finances its assets with $2,630,000 debt (costing 7.7 percent and is all tax deductible) and 530,000 shares of stock selling at $8.00 per share. To reduce the firm's risk associated with this financial leverage, the firm is considering reducing its debt by $1,000,000 by selling an additional 330,000 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 $863,000. Calculate the change in the firm's EPS from this change in capital structure. (Do not round intermediate calculations and round your final 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
Problem 1PS
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Transcribed Image Text:Consider a firm with an EBIT of $863,000. The firm finances its assets with $2,630,000 debt (costing 7.7 percent and is all tax
deductible) and 530,000 shares of stock selling at $8.00 per share. To reduce the firm's risk associated with this financial leverage, the
firm is considering reducing its debt by $1,000,000 by selling an additional 330,000 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 $863,000.
Calculate the change in the firm's EPS from this change in capital structure. (Do not round intermediate calculations and round your
final answers to 2 decimal places.)
EPS before
EPS after
Difference
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