Question

Simone's Sweets is an all-equity firm that has 8,500 shares of stock outstanding at a market price of $26 per share. The firm's management has decided to issue $80,000 worth of debt at an interest rate of 8 percent. The funds will be used to repurchase shares of the outstanding stock. What are the earnings per share at the break-even EBIT?

Multiple Choice

• $2.08

• $3.53

• $2.50

• $5.75

• $3.26

Answer 1

The EPS is computed as follows:

Interest will be as follows:

= $ 80,000 x 8%

= $ 6,400

Shares after repurchase will be as follows:

= 8,500 - $ 80,000 / $ 26

= 5,423.076923

So, the EPS will be as follows:

(EBIT - 0) / 8,500 = (EBIT - $ 6,400) / 5,423.076923

5,423.076923 EBIT = 8,500 EBIT - $ 54,400,000

EBIT = $ 54,400,000 / 3,076.923077

EBIT = $ 17,680

So, the EPS will be as follows:

= $ 17,680 / 8,500

= $ 2.08

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