Question

In the following example, the proposed debt issue would raise $4,000,000; the interest rate would be 10%. In addition, the EBIT would be $2,000,000. What would be the increase in the Earnings Per Share (EPS) from to current to the proposed structure

Answer 1

Answer:

$1.67

Explanation:

The computation of the increase in earning per share is shown below:

But before that first we need to find out the current and proposed earning

per share

Particulars                       Current                       Proposed

Number of shares        $400,000                    $240,000  (a)

EBIT                                  $2,000,000               $2,000,000

Less:

Interest                                                                $400,000

                                                                   ($4,000,000 ×0.10)

EBT                                   $2,000,000               $1,600,000

Less

Taxes                                $0                               $0

Net income                       $2,000,000              $1,600,000 (b)

EPS                                    $5                              $6.67 (a ÷ b)

Increase in EPS

= $6.67 - $5

= $1.67