Consider a firm with an EBITDA of $16,600,000 and an EBIT of $12,300,000. The firm finances its assets with $53,600,000 (costing 7.8 percent all of which is tax deductible) and 11,800,000 shares of stock selling at $8.00 per share. The firm is con increasing its debt by $26,800,000, using the proceeds to buy back shares of stock. The firm's tax rate is 21 percent. The capital structure will have no effect on the operations of the firm. Thus, EBIT will remain at $12,300,000. Calculate the EPS before and after the change in capital structure and indicate changes in EPS. Note: For "Change in EPS", note negative changes with a negative sign. Round your answers to 3 decimal places. EPS before EPS after Change in EPS
Cost of Capital
Shareholders and investors who invest into the capital of the firm desire to have a suitable return on their investment funding. The cost of capital reflects what shareholders expect. It is a discount rate for converting expected cash flow into present cash flow.
Capital Structure
Capital structure is the combination of debt and equity employed by an organization in order to take care of its operations. It is an important concept in corporate finance and is expressed in the form of a debt-equity ratio.
Weighted Average Cost of Capital
The Weighted Average Cost of Capital is a tool used for calculating the cost of capital for a firm wherein proportional weightage is assigned to each category of capital. It can also be defined as the average amount that a firm needs to pay its stakeholders and for its security to finance the assets. The most commonly used sources of capital include common stocks, bonds, long-term debts, etc. The increase in weighted average cost of capital is an indicator of a decrease in the valuation of a firm and an increase in its risk.
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