Dexter's is an unlevered firm with a total market value of $348,000 with 20,000 shares of stock outstanding.The firm has expected EBIT of $27,500 if the economy is normal and $32,000 if the economy booms.The firm is considering a bond issue of $69,600 with an attached interest rate of 6 percent.The bond proceeds will be used to repurchase shares.The tax rate is 35 percent.Compute the EPS after the repurchase for both a normal and a boom economy.What is the percentage increase in EPS if the economy booms rather than being normal?
A)18.78%
B)21.42%
C)19.84%
D)20.28%
E)19.29%

Question

Quizplus · Accepted Answer

Price per share = $348,000/20,000 = $17.40Number of shares repurchased = $69,600/$17.40 = 4,000 sharesEPS_Normal = {[$27,500 - (.06 × $69,600)](1 - .35)}/(20,000 - 4,000)= $.9475375EPS_Boom = {[$32,000 - (.06 × $69,600)](1 - .35)}/(20,000 - 4,000)= $1.13035Percentage increase in EPS = ($1.13035 - .9475375)/$.9475375 = .1929,or 19.29%

Dexter's Is an Unlevered Firm with a Total Market Value