Consider a firm with an EBITDA of $14,400,000 and an EBIT of $11,200,000. The firm finances its assets with $51,400,000 debt (costing 7.2 percent) and 10,700,000 shares of stock selling at $6.00 per share. The firm is considering increasing its debt by $25,800,000, 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 $11,200,000.Calculate the EPS before and after the change in capital structure and indicate changes in EPS. (Round your answers to 3 decimal places.) EPS before$EPS after$Changes in EPS$

Question
Asked Aug 28, 2019

Consider a firm with an EBITDA of $14,400,000 and an EBIT of $11,200,000. The firm finances its assets with $51,400,000 debt (costing 7.2 percent) and 10,700,000 shares of stock selling at $6.00 per share. The firm is considering increasing its debt by $25,800,000, 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 $11,200,000.

Calculate the EPS before and after the change in capital structure and indicate changes in EPS. (Round your answers to 3 decimal places.)

 
EPS before $
EPS after $
Changes in EPS $
check_circleExpert Solution
Step 1

For the computation of EPS, it is important to compute Interest expense, tax and net income.

Debt=$51,400,000

Interest Expense=7.2%

Compute the Interest Expense:

 

Interest Expense = Debt x Interest Factor
Interest Expense = $51,400,000 x0.072
$3,700,800
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Interest Expense = Debt x Interest Factor Interest Expense = $51,400,000 x0.072 $3,700,800

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Step 2

Computation of tax:

Tax Rate=21%

EBIT=$11,200,000

Interest=$3,700,800

The computation of tax is shown below:

 

Tax EBIT Interest) x Tax Rate
$7,499,200 x 0.21
= $1,574,832
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Tax EBIT Interest) x Tax Rate $7,499,200 x 0.21 = $1,574,832

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Step 3

Computation of Net Income:

EBIT=$11,200,000

Interest=$3,700,800

Tax=$1,574,832

T...

Net Income (EBIT Interest)- Tax
= $7,499,200-$1,574,832
= $5,924,368
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Net Income (EBIT Interest)- Tax = $7,499,200-$1,574,832 = $5,924,368

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