Answer:
EPS before change in capital structure = $2.34
EPS after change in capital structure $3.45
Difference in EPS caused by the change ($1.11)
Explanation:
a) Data and Calculations:
EBIT = $559,000
6.4% Debts = $1,090,000
Common stock = 209,000 shares at $15 per share
EPS before increasing debt:
EBIT = $559,000
Interest (69,760) (6.4% of $1,090,000)
Net income = $489,240
EPS = $489,240/209,000 = $2.34 per share
EPS after increasing debt:
New debt = $1,990,000 ($1,090,000 + $900,000)
New equity shares = 125,000 shares (209,000 - 84,000)
EBIT = $559,000
Interest (127,360) (6.4% of $1,990,000)
Net income = $431,640
EPS = $431,640/125,000 = $3.45 per share
EPS before change in capital structure = $2.34
EPS after change in capital structure $3.45
Difference in EPS caused by the change ($1.11)
