Lexington Company is an unlevered firm with a total market value of $32,820,000
ID: 2783924 • Letter: L
Question
Lexington Company is an unlevered firm with a total market value of $32,820,000 with 1,000,000 shares of stock outstanding. The firm has expected EBIT of $2,130,000 if the economy is normal and $2,756,000 if the economy booms. The firm is considering a $6,000,000 bond issue with an attached interest rate of 5.9 percent. The bond proceeds will be used to repurchase shares. Ignore taxes. What will the earnings per share be after the repurchase if the economy booms?
$2.34
$2.50
$2.72
$2.94
$3.12
$2.34
$2.50
$2.72
$2.94
$3.12
Explanation / Answer
Answer) Market value =32,820,000
Number of shares outstanding = 1000000
Price per share = 32820,000 / 1000000 = 32.82
Shares repurchased = 6000000/32.82 = 182,815
New number of outstanding shares = 1000000-182,815 = 817,814.64
Now we calculating the EPS in Boom
EPS = Net Income / Number of outstanding shares = 2402000/ 817,814.64 = 2.94
EBIT in Boom 2756000 - Interest 6000000*5.9% = 354000 EBT 2756000-354000 = 2,402,000 - Taxes 0 Net Income 2402,000Related Questions
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