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Ventec is an unlevered firm with a total market value of $5,320,000 with 420,000 shares of...

Ventec is an unlevered firm with a total market value of $5,320,000 with 420,000 shares of stock outstanding. The firm has expected EBIT of $400,000 if the economy is normal and $700,000 if the economy booms. The firm is considering a $2,200,000 bond issue with an attached interest rate of 6.3 percent. The bond proceeds will be used to repurchase shares. Ignore taxes. What will the earnings per share be after the repurchase if the economy booms?

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Answer #1

Answer :- EPS = $2.279

Calculation :-

Market Price of share = 5320000 / 420000 = $12.66667

Issued bond of 2200000 with 6.3% interest rate. So its itterest liablity will be 138600.

And amount of 2200000 will be used to repurchase shares

No. Of stock purchased back = $ 2200000 / 12.66667 = 173684.16 or 173684 shares

No. Of stock (after stock repurchase) = 420000 - 173684 shares = 246316 shares

EBT = EBIT(when economy booms) - Interest

= 700000 - 138600

= 561400

EPS ( after stock repurchase) = EBT / Share after stock repurchase

= 561400 / 246316

= 2.279

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