Ask Question
BusinessBusiness
4 February, 21:39

Consider a firm with an EBIT of $500,000. The firm finances its assets with $2,000,000 debt (costing 6 percent) and 50,000 shares of stock selling at $20.00 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 50,000 shares of stock. The firm is in the 40 percent tax bracket. The change in capital structure will have no effect on the operations of the firm. Thus, EBIT will remain $500,000. What is the change in the firm's EPS from this change in capital structure?

+2
Answers (1)
  1. 4 February, 21:55
    0
    EPS is reduced by $1.92 and 42%

    Explanation:

    EBIT $500,000

    Interest Expense ($120,000) ($2,000,000 x 6%)

    EBT $380,000

    Tax 40% ($152,000)

    Net Earninig $228,000

    Outstanding stock = 50,000

    EPS = $228,000 / 50,000 = $4.56 per share

    Change in Capital Structure.

    EBIT $500,000

    Interest Expense ($60,000) ($1,000,000 x 6%)

    EBT $440,000

    Tax 40% ($176,000)

    Net Earninig $264,000

    Outstanding stock = 50,000 + 50,000 = 100,000

    EPS = $264,000 / 100,000 = $2.64 per share

    Change in EPS = $4.56 - $2.64 = $1.92 per share

    Change in EPS = $1.92 / $4.56 = 0.42 = 42%
Know the Answer?
Not Sure About the Answer?
Find an answer to your question 👍 “Consider a firm with an EBIT of $500,000. The firm finances its assets with $2,000,000 debt (costing 6 percent) and 50,000 shares of stock ...” in 📗 Business if the answers seem to be not correct or there’s no answer. Try a smart search to find answers to similar questions.
Search for Other Answers
You Might be Interested in
Professor Milton wants to examine the relationship between brain damage and intelligence levels in adults. She wants to know whether brain damage has any relation to intelligence and, if so, what the extent of this relationship is likely to be.
Answers (1)
Pharoah Corporation had net sales of $2,410,700 and interest revenue of $40,600 during 2017. Expenses for 2017 were cost of goods sold $1,458,400, administrative expenses $219,700, selling expenses $285,300, and interest expense $49,100.
Answers (1)
Why is the net profit margin expressed as a percentage?
Answers (1)
Why do people invest in the stock market
Answers (2)
In a mortgage loan, the borrower always creates two documents: a note and a mortgage. Which of the following pieces of information is provided in the mortgage? A. How the interest rate is to be computed. B.
Answers (1)
New Questions in Business
The primary goals of inventory managers are to maintain a sufficient quantity of inventory to meet customers' needs, ensure inventory quality meets customers' expectations and company standards, and minimize the cost of acquiring and carrying an
Answers (1)
Stacy Hanes is an African-American woman who has recently taken her first job and does not seem to like the work environment at all, Her colleagues put down her ideas at team meetings and refer to them as "stupid.
Answers (1)
The owner of a bicycle repair shop forecasts revenues of $160,000 a year. Variable costs will be $50,000, and rental costs for the shop are $30,000 a year. Depreciation on the repair tools will be $10,000.
Answers (1)
Sagon Corporation has provided data concerning the Corporation's Manufacturing Overhead account for the month of September.
Answers (1)
What is the alternate name for income tax return form1040?
Answers (1)
Home » Business » Consider a firm with an EBIT of $500,000. The firm finances its assets with $2,000,000 debt (costing 6 percent) and 50,000 shares of stock selling at $20.00 per share.
Sign Up Forgot Password?