Yang Centers wants to report at least $1.75 in earnings per share. Given the following information, how much debt should be in its capital structure? $\begin{array}{ll}
\text { Book value per share: } & \$ 8.75 \
\text { Cost of debt: } & 10 \text { percent } \
\text { EBIT: } & \$ 500,000 \
\text { Tax bracket: } & 30 \text { percent } \
\text { Total Capital: } & \$ 4,000,000
\end{array}$
A) $457,142
B) $520,050
C) $2,800,000
D) $3,461,538

Question

Quizplus · Accepted Answer

To achieve $1.75 earnings per share, calculate the required net income and then determine the interest expense that allows this net income after taxes. Using the formula: EPS = (EBIT - Interest) * (1 - Tax Rate) / Number of Shares, solve for the interest and hence the debt. The correct debt amount is $3,461,538.

Yang Centers Wants to Report at Least $1 A) $457,142 B) $520,050 C) $2,800,000 D) $3,461,538

Yang Centers Wants to Report at Least $1 A) $457,142
B) $520,050
C) $2,800,000
D) $3,461,538