Question

Cross Town Cookies is an all-equity firm with a total market value of $770,000. The firm has 46,000 shares of stock outstanding. Management is considering issuing $191,000 of debt at an interest rate of 7 percent and using the proceeds to repurchase shares. Before the debt issue, EBIT will be $69,800. What is the EPS if the debt is issued

Answer 1

Answer:

EPS after debt issue =  $1.63

Explanation:

The earning per share after the debt issue is referred to mas revised earnings per share. Th revised earnings per share =

Revised earnings / No of shares after debt issue

Revised Earnings =EBIT before debt issue - Interest cost

        =  69,800 - (7%× 191,000) = $56,430

Units of shares re-purchased = Proceeds from debt / price per share

Price per share =  Market value of firm /outstanding shares

                           = $770,000/46,000 = 16.73913043

Units of shares re-purchased = $191,000/ 16.73913043

                                                = 11,410.39 units

Revised outstanding shares = 46,000 -  11,410.39 =  34,589.61 units

EPS after debt issue= $56,430/ 34,589.61  units

                                   =  $1.63