Consider a firm with an EBITDA of $1,100,000 and an EBIT of $1,000,000. The firm finances its assets with $4,600,000 debt (costing 8.6 percent, all of which is tax deductible) and 206,000 shares of stock selling at $13 per share. To reduce risk associated with this financial leverage, the firm is considering reducing its debt by $2,600,000 by selling additional 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 $1,000,000. Calculate the EPS before and after the change in capital structure and indicate changes in EPS. (Do not round intermediate calculations. Round your answers to 2 decimal places.) Answer is complete but not entirely correct. EPS before $ 3.34 x EPS after $ 1.69 x Changes in debt $ 1.65 X
Consider a firm with an EBITDA of $1,100,000 and an EBIT of $1,000,000. The firm finances its assets with $4,600,000 debt (costing 8.6 percent, all of which is tax deductible) and 206,000 shares of stock selling at $13 per share. To reduce risk associated with this financial leverage, the firm is considering reducing its debt by $2,600,000 by selling additional 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 $1,000,000. Calculate the EPS before and after the change in capital structure and indicate changes in EPS. (Do not round intermediate calculations. Round your answers to 2 decimal places.) Answer is complete but not entirely correct. EPS before $ 3.34 x EPS after $ 1.69 x Changes in debt $ 1.65 X
Chapter15: Dividend Policy
Section: Chapter Questions
Problem 4P
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Transcribed Image Text:Consider a firm with an EBITDA of $1,100,000 and an EBIT of $1,000,000. The firm finances its assets with $4,600,000 debt (costing
8.6 percent, all of which is tax deductible) and 206,000 shares of stock selling at $13 per share. To reduce risk associated with this
financial leverage, the firm is considering reducing its debt by $2,600,000 by selling additional 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 $1,000,000.
Calculate the EPS before and after the change in capital structure and indicate changes in EPS. (Do not round intermediate
calculations. Round your answers to 2 decimal places.)
Answer is complete but not entirely correct.
EPS before
$
3.34 x
EPS after
$
1.69 x
Changes in debt
$
1.65 X
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