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Assume that Rose Corporation's (RC)EBIT is not expected to grow in the future and that all earnings are paid out as dividends.RC is currently an all-equity firm.It expects to generate earnings before interest and taxes (EBIT)of $6 million over the next year.Currently RC has 5 million shares outstanding and its stock is trading for a price of $12.00 per share.RC is considering borrowing $12 million at a rate of 6% and using the proceeds to repurchase shares at the current price of $12.00.
-Prior to any borrowing and share repurchase,RC's EPS is closest to:
A)$0.60.
B)$1.00.
C)$1.20.
D)$0.50.

Question

Quizplus · Accepted Answer

RC's EBIT is $6 million and it has no interest expense or taxes to pay, so its earnings available for equity holders (Earnings after Taxes or EAT) will also be $6 million. Since RC has 5 million shares outstanding, its earnings per share (EPS) would be $6 million divided by 5 million, or $1.20.

Use the Information for the Question(s)below