Problem 2-5 Income Statement (LG2-1) Consider a firm with an EBIT of $855,000. The firm finances its assets with $2,550,000 debt (costing 8 percent and is all tax deductible) and 450,000 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 250,000 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 $855,000. 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
Problem 2-5 Income Statement (LG2-1) Consider a firm with an EBIT of $855,000. The firm finances its assets with $2,550,000 debt (costing 8 percent and is all tax deductible) and 450,000 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 250,000 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 $855,000. 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
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Transcribed Image Text:Problem 2-5 Income Statement (LG2-1)
Consider a firm with an EBIT of $855,000. The firm finances its assets with $2,550,000 debt (costing 8 percent
and is all tax deductible) and 450,000 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 250,000 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 $855,000.
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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