Question

Consider a firm with an EBIT of $10,600,000. The firm finances its assets with $50,200,000 debt...

Consider a firm with an EBIT of $10,600,000. The firm finances its assets with $50,200,000 debt (costing 6.6 percent) and 10,100,000 shares of stock selling at $10.00 per share. The firm is considering increasing its debt by $25,100,000, using the proceeds to buy back shares of stock. The firm is in the 40 percent tax bracket. The change in capital structure will have no effect on the operations of the firm. Thus, EBIT will remain at $10,600,000.

Calculate the change in capital structure and indicate changes in EPS.

EPS Before: 0.432

EPS After: 0.445

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