Consider a firm with an EBITDA of $1,100,000 and an EBIT of $1,000,000. The firm finances its assets with $4,530,000 debt (costing 8.2 percent, all of which is tax deductible) and 202,000 shares of stock selling at $11 per share. To reduce risk associated with this financial leverage, the firm is considering reducing its debt by $2,530,000 by selling additional shares of stock. The firm’s tax rate is 21 percent. The change in capital structure will have no effect on the operations of the firm. Thus, EBIT will remain at $1,000,000.Calculate the EPS before and after the change in capital structure and indicate changes in EPS. (Do not round intermediate calculations. Round your answers to 2 decimal places.)

Consider a firm with an EBITDA of $1,100,000 and an EBIT of $1,000,000. The firm finances its assets with $4,530,000 debt (costing 8.2 percent, all of which is tax deductible) and 202,000 shares of stock selling at $11 per share. To reduce risk associated with this financial leverage, the firm is considering reducing its debt by $2,530,000 by selling additional shares of stock. The firm’s tax rate is 21 percent. The change in capital structure will have no effect on the operations of the firm. Thus, EBIT will remain at $1,000,000.Calculate the EPS before and after the change in capital structure and indicate changes in EPS. (Do not round intermediate calculations. Round your answers to 2 decimal places.)

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter14: Capital Structure Management In Practice

Section: Chapter Questions

Problem 24P

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