As the Financial vice president for Bear Enterprises, you have the following inf
ID: 2774901 • Letter: A
Question
As the Financial vice president for Bear Enterprises, you have the following information:
Expected net income after tax next year before new financing : $60,000,000
Sinking Fund payments due next year on existing debt: $20,000,000
Interest due next year on existing debt $18,000,000
Conpany Tax rate 25%
Common Stock Price, per share $17
Common Shares outstanding: 22,000,000
Calculate Bear's Earnings Per Share for next year assuming the firm raises $60 Million of new debt at an interest rate of 9 percent
$2.54
$22.54
$1.69
$16.95
a.$2.54
b.$22.54
c.$1.69
d.$16.95
Explanation / Answer
New Interest Expenses = 60,000,000*9% = $ 5,400,000
Tax saving on New Interest Expneses = 5400000*25% = $ 1,350,000
Expected net income after tax next year before new financing = $ 60,000,000
Expected net income after tax next year after new financing = Expected net income after tax next year before new financing - New Interest Expenses + Tax saving on New Interest Expneses
Expected net income after tax next year after new financing = 60000000 - 5400000 + 1350000
Expected net income after tax next year after new financing = $ 55,950,000
Bear's Earnings Per Share = Expected net income after tax next year after new financing / Common Shares outstanding
Bear's Earnings Per Share = 55950000/22000000
Bear's Earnings Per Share = $ 2.54
Answer
A) $ 2.54
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