Oak Farms is an unlevered firm with 1750 shares outstanding and an EBIT of 625 .

Question

Oak Farms is an unlevered firm with 1750 shares outstanding and an EBIT of 625. Corporate earnings are taxed at a rate of 36%.

Calculate EPS for Oak Farms. $___ Note: Your answer should be in dollars and cents. For example, $0.99.

Suppose that Oak Farms makes a decision to partition (split) its assets into debt and equity. The firm issues $1250 of debt at a cost of 8.65%, and uses these funds to reduce the amount of equity on its books. The partition does not change the EBIT or the tax rate, but does reduce the number of shares outstanding to 1000.

Compute Oak Farms EPS after the partition. $____ Note: Your answer should be in dollars and cents.

You Must Get Both Parts Correct to Receive Credit

Explanation / Answer

Note: Please ask in comment for any further help, Thanks.

Part 1 EBIT 625 Less: Tax at 36% 225 Earnings after Tax 400 ÷ No of shares Outstanding 1750 EPS $       0.23 Part 2 EBIT 625 Less: Interest (1250 x 8.65%) 108.125 EBT 516.875 Less: Tax at 36% 186.075 Earnings after Tax $ 330.80 ÷ No of shares Outstanding 1000 EPS $       0.33

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