You may attempt this question 3 more times for credit. Oak Farms is an unlevered

Question

You may attempt this question 3 more times for credit. Oak Farms is an unlevered firm with 3050 shares outstanding and an EBIT of 625. Corporate earnings are taxed at a rate of 33% Calculate EPS for Oak Farms. $ Suppose that Oak Farms makes a decision to partition (split) its assets into debt and equity. The firm issues $2050 of debt at a cost of 7.70%, and uses these funds to reduce the amount of Note: Your answer should be in dollars and cents. For example, $0.99. 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. $ You Must Get Both Parts Correct to Receive Credit Note: Your answer should be in dollars and cents.

Explanation / Answer

For an unlevered firm EPS = EBIT * (1-Tax rate )/no of shares outstanding = 625 * ( 1-33%)/3050 = 0.1373 or 0.14

Firm issues debt =$2050
Interest = Debt * interest rate = 2050 * 7.7% = 157.85
Net income = (EBIT - Interest)* ( 1- tax rate) =( 625 - 157.85) * ( 1- 33%) = 312.9905
Outstanding shares = 2300
EPS after the partition = 312.9905/2300 =0,1361 or 0.14.

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