10. 1000 points value Consider a firm with an EBIT of $1.015,000. The fim financ
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10. 1000 points value Consider a firm with an EBIT of $1.015,000. The fim finances its assets with $4,800,000 debt (costing 7.5 percent) and 215,000 shares of stock selling at $15 00 per share. To reduce risk associated with this financial leverage, the firm is considering reducing its debt by $2,730,000 by selling additional shares of stock The firm is in the 30 percent tax bracket The change in capital structure will have no effect on the operations of the firm. Thus, EBIT will remain at $1.015,000 Calculate the EPS before and after the change in capital structure and indicate changes in EPS. (Negative answer should be indicated by a minus sign. Round your answers to 2 decimal places.) EPS before EPS after DifferenceExplanation / Answer
EBIT = $ 1015000
LESS: Interest Expense = Cost of Debt x Existing Debt = 0.075 x 4800000 = $ 360000
EBT = $ 655000
LESS: Tax at 30 % = 655000 x 0.3 = $ 196500
Net Income = $ 458500
EPS Before = 458500 / Number of Shares = 458500 / 215000 = $ 2.13
Debt Reduction Quantum = $ 2730000
Number of Additional Shares Required = 2730000 / 15 = 182000
Total Number of Shares post Debt Retirement = 182000 + 215000 = 397000
EBIT = $ 1015000
LESS: Interest Expense = Cost of Debt x Existing Debt = 0.075 x (4800000 - 2730000) = $ 155250
EBT = $ 859750
LESS: Tax at 30 % = 0.3 x 859750 = $ 257925
Net Income = $ 601825
EPS After = 601825 / 397000 = $ 1.52
Difference = 2.13 - 1.52 = $ 0.61
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