Oak Farms is an unlevered firm with 2050 shares outstanding and an EBIT of 650 .

Question

Oak Farms is an unlevered firm with 2050 shares outstanding and an EBIT of 650. Corporate earnings are taxed at a rate of 35%.

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 $1350 of debt at a cost of 8.15%, 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 1300.

Compute Oak Farms EPS after the partition. $_________

Note: Your answer should be in dollars and cents.

Explanation / Answer

1)

Net income = (EBIT-INTEREST)*(1-TAX RATE)=(650-0)*(1-35%)=422.50

EPS=NET INCOME/SHARE NUMBERS=422.50/2050=0.2061 PER SHARE

2)

Interest expense=1350*8.15%=110.025

Net income = (EBIT-INTEREST)*(1-TAX RATE)=(650-110.025)*(1-35%)=350.9838

EPS=350.9838/1300=0.27

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