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Nata [24]
3 years ago
14

Firm BUS106 now has 100,000 shares of common stock outstanding, and the total market value of equity equals $5,000,000. It also

has an equal amount of debt. Firm BUS106 is expected to generate $1,500,000 in EBIT with a $250,000 of interest expense. Assume tax rate is 0, what will happen to earning per share (EPS) if firm BUS106 buys back $2,500,000 of shares, and the firm substitutes an equal amount of additional debt
Business
2 answers:
Llana [10]3 years ago
6 0

Answer:

EPS will increase double from $12.5 per share to $25 per share as the buying back takes place.

Explanation:

As the firm tax rate is 0, we have the firm's net profit = EBIT - interest expenses = $1,500,000 - $250,000 = $1,250,000.

=> The firm's EPS before the buy back = 1,250,000/100,000 = $12.5

Since the buys back worth $2,500,000 or 50% of the market value of the firm, there is 50% of the shares is bought back which makes only 50,000 shares outstanding. Profit is unchanged this year, since the buy back and issuing of new debt takes place at the end of the reporting period, so interest expenses is not changed for the reporting period.

=> The firm's EPS after buy back = 1,250,000/50,000 = $25.

So, EPS will increase double from $12.5 per share to $25 per share as the buying back takes place.

kogti [31]3 years ago
3 0

Answer:

EPs befor buy-back 12.5

afer buy-back 22.5

Explanation:

<u>current earning per share:</u>

EBIT - interest - taxes = ent income

1,500,000 - 250,000 - 0 = 1,250,000

shares outstanding 100,000

<u>EPS </u>BEFORE BUY-BACK

EPS = \frac{income-preferred \: dividends}{outstanding \: common \: stock}

EPS = \frac{1,250,000}{100,000}

EPS 12.5

After buyback:

the company is buying 2,500,000 /5,000,000 = 50% of the shares

thus it wil drop from 100,000 to 50,000

Now, we solve for the additional interest expense using cross multiplication:

5,000,000 of debt generate 250,000 iunterest

so 2,500,000 will do 250,000 / 5,000,000 x 2,5000,000 = 125,000

Now we solve for net income:

1,500,000 EBIT - 250,000 orignal interest - 125,000 addional= 1,125,000

Last step new EPS

EPS = \frac{1,125,000}{50000}

EPS 22.5

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2 years ago
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Which of the following statements is FALSE?A) As the enterprise value represents the entire value of a firm before the firm pays
hammer [34]

Answer:

The false statement is letter "A": As the enterprise value represents the entire value of a firm before the firm pays its debt, to form an appropriate multiple, we divide it by a measure of earnings or cash flows after interest payments are made.

Explanation:

Indeed, the value of a firm represents its value before deducting what the company owes. Though, in order to calculate the correct multiple, specialists tend to divide the debt by a measure of income or cash flows before interest payments go through.

6 0
3 years ago
Crafting a strategy to compete in one or more foreign markets can be considered complex because 34) A) factors that affect indus
Wewaii [24]

Answer:

Options A, B, C, and E.

(Please check the explanation section before you judge or pick your answer)

Explanation:

The options A, B, C, and E are the options that are considered complex if we want to Craft a strategy to compete in one or more foreign markets.

Please take note that if the question asked us to pick which of the options is NOT a inherently complex reason when crafting a strategy to compete in one or more foreign markets then we would have picked Option D.

As given in the question, that is option D which says; '' buyer tastes and preferences creates challenges in standardizing products and services." Will not be a reason for crafting a strategy to compete in one or more foreign markets is inherently complex.

Countries due to globalization tends to participate in international trades. Competition in the international trade has its advantages as well as its disadvantages or risks.

To trade in the international market, countries must have their individual strategies and Option D above is NOT a inherently complex reason when crafting a strategy to compete in one or more foreign markets

4 0
3 years ago
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d (i). Suppose that ZX Inc. is currently selling at $50 per share. You buy 200 shares, using $5,000 of your own money and borrow
strojnjashka [21]

Answer:

-21%

Explanation:

Initial share price = $50

Share price after 1 year = $46

net return = (200 x $46) - $10,000 - ($5,000 x 5%) = $9,200 - $10,000 - $250 = -$1,050

rate of return of margined position = -$1,050 / $5,000 = -0.21 = -21%

when you operate on the margin, your earnings can increase or decrease dramatically. In this case, an 8% price decrease resulted in a 215 lose.

8 0
3 years ago
A famous painting was sold in 1947 for ​$21 comma 320. In 1998 the painting was sold for ​$32.1 million. What rate of interest c
Elden [556K]

Answer: 15.42%

Explanation: PV ( present value) = $21,320

FV (Future Value) =$ 32.1 million.

Years(y) = 1947-1998 = 51years

r = (FV/PV)^(1/y) - 1

r = ( $32,100,000 / $21,320) ^ ( 1/51) - 1

r = ( $1505.6285)^ ( 0.0196) - 1

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r = 0.0154205 X 100%

r = 15.42%

4 0
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