Cross town cookies is an all-equity firm with a total market value of $4,187,100. the firm has 127,500 shares of stock outstanding. management is considering issuing $300,000 of debt at an interest rate of 6 percent and using the proceeds to repurchase shares. the projected earnings before interest and taxes are $215,600. what are the anticipated earnings per share if the debt is issued? ignore taxes. (round the number of shares repurchased down to the nearest whole share.)

Question

Van Goodman

Business

24 May, 08:58

Cross town cookies is an all-equity firm with a total market value of $4,187,100. the firm has 127,500 shares of stock outstanding. management is considering issuing $300,000 of debt at an interest rate of 6 percent and using the proceeds to repurchase shares. the projected earnings before interest and taxes are $215,600. what are the anticipated earnings per share if the debt is issued? ignore taxes. (round the number of shares repurchased down to the nearest whole share.)

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Talan Kim · Answer 1

The solution for the problem is:

You first get the shares repurchased = 300,000 / (4,187,000/127,500) = 9,135.42 shares

And then followed by the shares outstanding = 127,000 - 9,135.42 = 117,864.58 shares

Now you can compute for the EPS = [215,600 - (300,000 * 0.06) / 117,864.58 = $1.68