Oak Farms is an unlevered firm with 3050 shares outstanding and an EBIT of 625.

Question

Oak Farms is an unlevered firm with 3050 shares outstanding and an EBIT of 625. Corporate earnings are taxed at a rate of 32%.

Calculate EPS for Oak Farms. $________

Note: Your answer should be in dollars and cents. For example, $0.99.

Suppose that Oak Farms makes a decision to partition (split) its assets into debt and equity. The firm issues $2250 of debt at a cost of 8.65%, and uses these funds to reduce the amount of equity on its books. The partition does not change the EBIT or the tax rate, but does reduce the number of shares outstanding to 2300.

Compute Oak Farms EPS after the partition. $_______

Note: Your answer should be in dollars and cents. You Must Get Both Parts Correct to Receive Credit

Explanation / Answer

1. EPS for Oak Farms: $0.14

Net income = EBIT – Income tax expense = $625 – (32% x $625) = $625 - $200 = $425

EPS = $425 / 3050 shares = $0.14

2. Oak Farms EPS after the partition: $0.13

EBT = EBIT – Interest expense = $625 – ($2250 x 8.65%) = $625 - $194.63 = $430.37

Net income = EBT - Income tax expense = $430.37 – (32% x $430.37) = $430.37 - $137.72 = $292.65

EPS = $292.65 / 2300 shares = $0.13

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