Question

Paradise Travels is an all-equity firm that has 9,000 shares of stock outstanding at a market price of $27 a share. Management has decided to issue $25,000 worth of debt and use the funds to repurchase shares of the outstanding stock. The interest rate on the debt will be 7.3 percent. What are the earnings per share at the break-even level of earnings before interest and taxes

Answer 1

Answer:

$1.97

Explanation:

EBIT/9,000 = [EBIT - $25,000*(0.073)] / [9,000 - ($25,000 / $27)]

EBIT / 9,000 = [EBIT - $1,825] / 8074.07

EBIT = $17,739

EPS = [EBIT - $25,000*(0.073)] / [9,000 - ($25,000 / $27)]

EPS = [$17,739 - $25,000*(0.073)] / [9,000 - ($25,000 / $27)]

EPS = $1.97