Question

a company that has 25.000 outstanding shares will require a new financing of 500.000 TL from 50% common stock issuance and 50% bond issuance. All common stocks are sold at 10 TL per share (25.000 shares) and all bonds have a coupon rate of 8%. Expected EBIT is 100.000 TL. Income tax rate is 20%. What is the variability of EPS?

Answer 1

Solution:

Calculation of variablity of EPS

a)Calculation of EPS

Earning available of common stockholders=(EBIT-Interest)(1-tax rate)

=(100,000-20,000)(1-0.20)

=64000 TL

EPS=Earning available of common stockholders/Total no. of common stock

=64000 TL/25000+25000

=1.28 TL

b)EPS if there is no financing

Earning available of common stockholders=(EBIT-Interest)(1-tax rate)

=(100,000-0)(1-0.20)

=80,000TL

EPS=80,000TL/25000

=3.2TL

Variabilty of EPS=3.2TL-1.28 TL

=-1.92 TL

Variabilty of EPS(%)=(1.92 TL /3.2TL)*100

=-60%