Answer:
EPS is reduced by $1.92 and 42%
Explanation:
EBIT $500,000
Interest Expense ($120,000) ($2,000,000 x 6%)
EBT $380,000
Tax 40% <u>($152,000)</u>
Net Earninig <u>$228,000</u>
Outstanding stock = 50,000
EPS = $228,000 / 50,000 = $4.56 per share
Change in Capital Structure.
EBIT $500,000
Interest Expense ($60,000) ($1,000,000 x 6%)
EBT $440,000
Tax 40% <u>($176,000)</u>
Net Earninig <u>$264,000</u>
Outstanding stock = 50,000 + 50,000 = 100,000
EPS = $264,000 / 100,000 = $2.64 per share
Change in EPS = $4.56 - $2.64 = $1.92 per share
Change in EPS = $1.92 / $4.56 = 0.42 = 42%
