Question

ABC Corp. is currently all equity, and they have EBIT of $250,297. They currently have 9,812 shares outstanding, with a share price of 276. What will their EPS be if they move to a 50% equity capital structure? Their cost of debt is 0.06.

Answer 1

EBIT of ABC corp = $250,297

Market Value of equity of ABC corp = Share price*No of shares outstanding

= $276*9812

Market Value of equity of ABC corp = $2708,112

- ABC Corp moves to 50% equity capital structure which means that they will repurchase there 50% of Current Market Value of equity from Debt, such that Debt is 50% and Equity is 50%

Amount of debt raised = Market Value of Equity*50%

= $2708,112*50%

Amount of debt raised = $1354,056

Cost of Debt = 0.06

Interest Expenses on Debt = $1354,056*0.06

Interest Expenses on Debt = $81,243.36

Assuming there is no Tax as Tax rate is not given,

NEt income after Interest expenses = EBIT - Interest expenses

= $250,297 - $81,243.36

Net income = $169,053.64

No of shares outstaning after shares repurchase = 9812*50%

= 4906 shares

EPS = NEt income/No of shares outstaning

= $169,053.64/4906

EPS = $34.46 per share