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 the bond is issued? Assume tax rate of 50%.

0.25

0.48

0.65

0.36

A.

0.25

B.

0.48

C.

0.65

D.

0.36

Explanation / Answer

The correct answer is:

C. 0.65

Earnings per share = Net income / Shares of stock outstanding

Earnings per share = $10,360 / 16,000 = 0.65

EBIT $26,000 Less, Interest ($1,000 x 88 x 0.06) 5,280 EBT 20,720 Less tax 50% 10,360 Net income $10,360

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