Marley's is an unlevered firm with a total market value of $190,000 with 5,000 shares of stock outstanding.The firm has expected EBIT of $7,500 if the economy is normal and $9,000 if the economy booms.The firm is considering a $76,000 bond issue with an attached interest rate of 4.5 percent.The bond proceeds will be used to repurchase shares.The tax rate is 35 percent.What will be the earnings per share after the repurchase if the economy booms?
A)$1.333
B)$1.860
C)$1.950
D)$1.038
E)$1.209

Question

Quizplus · Accepted Answer

Price per share = $190,000/5,000 = $38Number of shares repurchased = $76,000/$38 = 2,000 sharesEPS_Boom = {[$9,000 - (.045 × $76,000)](1 - .35)}/(5,000 - 2,000)= $1.209

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