Glass Ornaments, Inc. Is an all equity firm with a total market value of $386,00

Question

Glass Ornaments, Inc. Is an all equity firm with a total market value of $386,000 and 15,000 shares of stock outstanding. Management has decided to Issue $75,000 of debt at an interest rate of 8 percent and use the proceeds on a stock repurchase As an all-equity firm, management believes the earnings before interest and taxes (EBIT) will be $31,000 If the economy is normal, $11,000 if it is in a recession, and $37,000 if the economy booms. Ignore taxes. What will the earnings per share (EPS) be if the economy remains normal, and management does issue the $75,000 debt at 8% and uses the proceeds to repurchase the stock? Select one: SmallCircle $2.07 SmallCircle $1.91 SmallCircle $.04 SmallCircle $1.27 SmallCircle $2.32

Explanation / Answer

Answer is Option A.

EBIT = $31,000

Debt raised = $75,000

Price per share outstanding = $386,000 / 15,000 = 25.73

Number of shares repurchased = 75,000 / 25.73 = 2,915

Number of shares outstanding = 15,000 – 2,915 = 12,085

EBT = $31,000 – 75,000 * 0.08 = $25,000

Earning per share = 25,000 / 12,085 = $2.07

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