Question

Consider a firm with an EBIT of $863,000. The firm finances its assets with $2,630,000 debt (costing 7.7 percent) and 530,000 shares of stock selling at $8.00 per share. To reduce the firm’s risk associated with this financial leverage, the firm is considering reducing its debt by $1,000,000 by selling an additional 330,000 shares of stock. The firm is in the 30 percent tax bracket. The change in capital structure will have no effect on the operations of the firm. Thus, EBIT will remain at $863,000. Calculate the EPS before and after the change in capital structure and indicate changes in EPS. (Negative answer should be indicated by a minus sign. Round your answers to 5 decimal places. EPS Before: EPS After: Difference:

Answer #1

Consider a firm with an EBIT of $861,000. The firm finances its
assets with $2,610,000 debt (costing 7.5 percent) and 510,000
shares of stock selling at $5.00 per share. To reduce the firm’s
risk associated with this financial leverage, the firm is
considering reducing its debt by $1,000,000 by selling an
additional 310,000 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....

Consider a firm with an EBIT of $11,800,000. The firm finances
its assets with $52,600,000 debt (costing 7.3 percent) and
11,300,000 shares of stock selling at $8.00 per share. The firm is
considering increasing its debt by $26,000,000, using the proceeds
to buy back shares of stock. The firm is in the 30 percent tax
bracket. The change in capital structure will have no effect on the
operations of the firm. Thus, EBIT will remain at $11,800,000.
Calculate the EPS...

Consider a firm with an EBIT of $565,000. The firm finances its
assets with $1,150,000 debt (costing 5.9 percent) and 215,000
shares of stock selling at $14.00 per share. The firm is
considering increasing its debt by $900,000, using the proceeds to
buy back 90,000 shares of stock. The firm is in the 30 percent tax
bracket. The change in capital structure will have no effect on the
operations of the firm. Thus, EBIT will remain at $565,000.
Calculate the...

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...

Consider a firm with an EBIT of $566,000. The firm finances its
assets with $1,160,000 debt (costing 6 percent) and 216,000 shares
of stock selling at $16.00 per share. The firm is considering
increasing its debt by $900,000, using the proceeds to buy back
91,000 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 $566,000.
Calculate the...

Consider an all-equity firm with 125,000 shares outstanding.
Assume that EBIT=800,000 and that EBIT will remain constant, the
firm pays out all profits (EPS = dividends per share) as dividends,
and that its tax rate is 40%. If the firm’s beta is 1.1, the
risk-free rate is 4%, and the market risk premium is 6%, what is
the firm’s stock price according to the dividend growth
model?
Now assume the firm is considering issuing $1.2m in debt at
before-tax cost...

EBIT—EPS and capital structure Data-Check is considering two
capital structures. The key information is shown in the following
table. Assume a 40% tax rate.
Source of capital
Structure A
Structure B
Long-term debt
$99,000
at
15.9%
coupon rate
$198,000
at
16.9%
coupon rate
Common stock
4,800
shares
2,400
shares
a. Calculate two EBIT-EPS coordinates for each of the
structures by selecting any two EBIT values and finding their
associated EPS values.
b. Plot the two capital structures on a set...

Dabney Electronics currently has no debt. Its operating income
(EBIT) is $20 million and its tax rate is 40 percent. It pays out
all of its net income as dividends and has a zero growth rate. It
has 2.5 million shares of stock outstanding. If it moves to a
capital structure that has 40 percent debt and 60 percent equity
(based on market values), its investment bankers believe its
weighted average cost of capital would be 10 percent. What would...

A firm has a debt to equity ratio of 2/3. Its cost of equity
is 15.2%, cost of debt is 4%, and tax rate is 35%. Assume that the
risk-free rate is 4%, and market risk premium is 8%.
Suppose the firm repurchases stock and finances the
repurchase with debt, causing its debt to equity ratio to change to
3/2:
What is the firm’s WACC before and after the change in
capital structure?
Compute the firm’s new equity beta and...

EBITlong dash—EPS
and capital structure????Data-Check is
considering two capital structures. The key information is shown in
the following table. Assume a
40 %40%
tax rate.
Source of capital
Structure A
Structure B
?Long-term debt
$97,000
at
15.2%
coupon rate
$194,000
at
16.2%
coupon rate
Common stock
4,600
shares
2,300
shares
a. Calculate two ?EBIT-EPS coordinates
for each of the structures by selecting any two EBIT values and
finding their associated EPS values.
b. Plot the two capital structures on a...

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