Top Up is a levered firm with assets valued at $300,000, has $25,000 of debt iss

Question

Top Up is a levered firm with assets valued at $300,000, has $25,000 of debt issued at 7% interest, and 2,000 shares of stock outstanding. Suppose that corporate profits are subject to a tax rate of 25%. Which of the following comes closest to the earnings before interest and tax (EBIT) of Top Up if its earnings per share (EPS) is $0.50?

$1,226

$1,753

$1,508

$3,083

$3,750

Bryant Industries is a firm with $850 million in assets and no debt financing. The shareholders of Bryant have convinced the management to take advantage of the tax deductibility of debt interest payments by issuing $100 million in new debt at 9% interest, and using the $100 million proceeds from the debt to repurchases that same amount of equity. The corporate tax rate is 28%. What is the new value of Bryant after the debt issue?

$850 million

$912 million

$878 million

$750 million

e. $712 million

$1,226

$1,753

$1,508

$3,083

$3,750

Explanation / Answer

1. EPS =0.5
So earnings or Net income = EPS * no of shares = 0.5 * 2000 = 1000
Earnings before taxes EBT = Net income/(1-tax rate) = 1000/( 1-25%) = 1333.33
EBIT = EBT + Interest = EBT + Debt * interest rate = 1333.33 + 25000 * 7% = 3083.33
option d is correct

2. Value of Levered firm = Value unlevered + Present value of interest tax shield = Value unlevered + Debt * tax rate =
850 + 100 * 28% = 850 + 28 = 878

Option c ( 878 million)

Best of Luck. God Bless

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