Question

Cross Town Cookies is an all-equity firm with a total market value of $695,000. The firm has 46,000 shares of stock outstanding. Management is considering issuing $146,000 of debt at an interest rate of 8 percent and using the proceeds to repurchase shares. Before the debt issue, EBIT will be $60,800. What is the EPS if the debt is issued? Ignore taxes.

Answer 1

Answer:

$1.67

Explanation:

The amount of shares that was repurchased is:

$300,000/($4,187,100/127,500)

= 9,135 shares

Outstanding shares is:

127,500-9,135

= 118,365 shares

Therefore, the EPS is:

= [$215,600 - ($300,000×.06)]/118,365.

= $1.67

Thus, the amount EPS after the debt was issued is $1.67