0% Debt, U 60% Debt, L Oper. income (EBIT) $400,000 $400,000 Required investment

ID: 2752259 • Letter: 0

Question

0% Debt, U 60% Debt, L

Oper. income (EBIT) $400,000 $400,000

Required investment $2,500,000 $2,500,000

% Debt 0.0% 60.0%

$ of Debt $0.00 $1,500,000

$ of Common equity $2,500,000 $1,000,000

Interest rate NA 10.00%

Tax rate 35% 35%

If the stock price is $80 per share, what would be the earnings per share under the leveraged capital structure?

A. $8.00

B. $10.25

C. $11.50

D. $13.00

E. $13.67

No. of stocks under levered capital structure N = value of equity/ price per share

= 1,000,000/80

= 12500

Net Income = (EBIT - Interest ) x (1-tax rate)

= (400,000 – 1500,000x10%) x(1-0.35)

= (400,000- 150,000) x(0.65)

= 162,500

Earnings per share = net income/ N

= 162500/12500

= 13 per share

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