Oak Farms is an unlevered firm with 2220 shares outstanding and an EBIT of 675.

Question

Oak Farms is an unlevered firm with 2220 shares outstanding and an EBIT of 675. Corporate earnings are taxed at a rate of 37%.

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 7.35%, 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 1470.

Compute Oak Farms EPS after the partition. $______ Note: Your answer should be in dollars and cents.

Explanation / Answer

Answer)

Earning Per share without debt

EPS = Net Income after tax / Number of shares = 425.25 / 2220 = 0.191554

Case 2 ) with debt

EPS = Net income after tax / Number of shares = 362.7383 / 1470 = 0.246761

EBIT 675 -Interest 0 EBT 675-0 = 675 -Taxes 37%*675 = 249.75 Net Income after tax 675 - 249.75 = 425.25

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