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horrorfan [7]
3 years ago
7

is an unlevered firm with a total market value of $3,900,000 with 60,000 shares of stock outstanding. The firm has expected EBIT

of $220,000 if the economy is normal and $280,000 if the economy booms. The firm is considering a $975,000 bond issue with an attached interest rate of 6 percent. The bond proceeds will be used to repurchase shares. Ignore taxes. What will the earnings per share be after the repurchase if the economy booms
Business
1 answer:
Korvikt [17]3 years ago
5 0

Answer:

Earnings per share= $3.58

Explanation:

Earnings per share(EPS) = Earnings attributable to share/Number of shares

Price per share = $3,900,000/60,000=$65 per share

The units of shares to be re-purchased with debt proceed

= The proceeds from debt/share price

=$975,000/$65= 15,000

The number of shares outstanding after repurchased = 60,000-15,000= 45,000 units

EBIT                                                     220,000

Less interest (6%×975,000)                <u> (58,500)</u>

Earnings attributable to shares           <u>    151,500</u>

Earnings per share                                151,500/45,000 units=$3.58

Earnings per share= $3.58

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