Question

Assume no taxes, no bankruptcy costs. Company U has no debt outstanding. The market value is € 410623, earnings before interest and taxes (EBIT) is € 55192 and the share price is € 42. Company U is considering a € 228388 debt issue with a 6% interest rate (the proceeds are used to buy back the shares).
Calculate Earnings per share (EPS).
How many shares will be bought back?
Calculate earnings per share (EPS) after the debt issue.

Answer 1

1. Earnings Per Share = (EBIT - Interest) / No of Equity Shares = (55192 - 0) / 9777 = 5.65

where No of Equity Shares = Market Value / Value per share = 410623 / 42 = 9777 appx (assuming no of shares cant be in fractions, and all infomration about price and market value is correct)

2. No of Shares bought back = 228388 / 42 = 5438 appx shares

3.   Earnings Per Share after debt issue =   (EBIT - Interest) / No of Equity Shares

= 410623 - (228388*6%) / (9777 - 5438) = 9.56