Consider a firm with an EBIT of $868,000. The firm finances its assets with $2,680,000 debt (costing 8.2 percent and is all tax deductible) and 580,000 shares of stock selling at $6.00 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 380,000 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 $868,000. Calculate the change in the firm's EPS from this change in capital structure. Note: 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 $868,000. The firm finances its assets with $2,680,000 debt (costing 8.2 percent and is all tax deductible) and 580,000 shares of stock selling at $6.00 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 380,000 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 $868,000. Calculate the change in the firm's EPS from this change in capital structure. Note: 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
Related questions
Question
Transcribed Image Text:Consider a firm with an EBIT of $868,000. The firm finances its assets with $2,680,000 debt (costing 8.2 percent and is all tax
deductible) and 580,000 shares of stock selling at $6.00 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 380,000 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 $868,000.
Calculate the change in the firm's EPS from this change in capital structure.
Note: Do not round intermediate calculations and round your final answers to 2 decimal places.
EPS before
EPS after
Difference
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 2 steps
Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education