Northern Wood Products is currently an all-equity firm with 16,000 shares of sto

Question

Northern Wood Products is currently an all-equity firm with 16,000 shares of stock outstanding and a total market value of $352,000. Management is considering raising additional $88,000 either by issuing additional 1000 common stocks at $88 each, or by issuing 88 bonds with a 6 percent coupon rate and $1000 face value. If the firm is expected to have EBIT of $26,000,

what will the earnings per share be if they issue additional stock? Assume tax rate of 50%.

0.48

0.65

0.36

0.76

A.

0.48

B.

0.65

C.

0.36

D.

0.76

Explanation / Answer

Ans is EPS=.76 as shown below

EBIT                                          26,000.00 Interest                                                          -   EBT                                          26,000.00 Tax @50%                                          13,000.00 EAT or Earnings available for Equity Shareholders                                          13,000.00 No of Equity Shares(Existing + new) (16,000+1,000)                                          17,000.00 EPS(Earnings/ No of shares)(13,000/17,000)                                                     0.76

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