JR Computers, a firm that manufactures and sells personal computers is an all-equity firm with 100,000 shares outstanding, $10 million in earnings after taxes and a market value of $ 150 million. Assume that this firm borrows $60 million at an interest rate of 8% and buys back 40,000 shares, using the funds. If the firm's tax rate is 50%, estimate the effect on earnings per share of the action.

Question

Kennedi Potts

Business

22 April, 20:29

JR Computers, a firm that manufactures and sells personal computers is an all-equity firm with 100,000 shares outstanding, $10 million in earnings after taxes and a market value of $ 150 million. Assume that this firm borrows $60 million at an interest rate of 8% and buys back 40,000 shares, using the funds. If the firm's tax rate is 50%, estimate the effect on earnings per share of the action.

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Ferrell · Answer 1

earnings per share ("EPS") of the action is increase 26% EPS = $126/$100 - 1

Explanation:

Earnings per share before action was $100 = $10 million / 100,000 shares

Interest expenses after tax is $2.4 million = 50% * $60 million * 8%

Earnings after action was $7.6 million = $10 million - $2.4 million

Earnings per share after action was $126 = $7.6 million / 60,000 shares