Consider a firm with an EBITDA of $14,000,000 and an EBIT of $11,000,000. The firm finances its assets with $51,000,000 debt (costing 7.0 percent all of which is tax deductible) and 10,500,000 shares of stock selling at $8.00 per share. The firm is considering increasing its debt by $25,000,000, using the proceeds to buy back 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 $11,000,000. Calculate the EPS before and after the change in capital structure and indicate changes in EPS. Note: For "Change in EPS", note negative changes with a negative sign. Round your answers to 3 decimal places. EPS before EPS after Change in EPS $ 0.559
Consider a firm with an EBITDA of $14,000,000 and an EBIT of $11,000,000. The firm finances its assets with $51,000,000 debt (costing 7.0 percent all of which is tax deductible) and 10,500,000 shares of stock selling at $8.00 per share. The firm is considering increasing its debt by $25,000,000, using the proceeds to buy back 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 $11,000,000. Calculate the EPS before and after the change in capital structure and indicate changes in EPS. Note: For "Change in EPS", note negative changes with a negative sign. Round your answers to 3 decimal places. EPS before EPS after Change in EPS $ 0.559
Chapter15: Dividend Policy
Section: Chapter Questions
Problem 13P
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Transcribed Image Text:Consider a firm with an EBITDA of $14,000,000 and an EBIT of $11,000,000. The firm finances its assets with $51,000,000 debt
(costing 7.0 percent all of which is tax deductible) and 10,500,000 shares of stock selling at $8.00 per share. The firm is
considering increasing its debt by $25,000,000, using the proceeds to buy back 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 $11,000,000.
Calculate the EPS before and after the change in capital structure and indicate changes in EPS.
Note: For "Change in EPS", note negative changes with a negative sign. Round your answers to 3 decimal places.
EPS before
EPS after
Change in EPS
$
0.559
I
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