Consider a firm with an EBIT of $1,000,000. The firm finances its assets with $4,500,000 debt (costing 8 percent) and 200,000 shares of stock selling at $16.00 per share. To reduce risk associated with this financial leverage, the firm is considering reducing its debt by $2,500,000 by selling additional 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 $1,000,000. Calculate the change in the firm’s EPS from this change in capital structure.
Answer to relevant QuestionsConsider a firm with an EBIT of $10,500,000. The firm finances its assets with $50,000,000 debt (costing 6.5 percent) and 10,000,000 shares of stock selling at $10.00 per share. The firm is considering increasing its debt by ...Chris’ Outdoor Furniture, Inc., has net cash flows from operating activities for the last year of $340 million. The income statement shows that net income is $315 million and depreciation expense is $46 million. During the ...You have been given the following information for PattyCake’s Athletic Wear Corp. for the year 2015: a. Net sales = $38,250,000; b. Cost of goods sold = $22,070,000;c. Other operating expenses = $5,300,000;d. Addition to ...A firm has an average collection period of 10 days. The industry average ACP is 25 days. Is this a good or poor sign about the management of the firm’s accounts receivable?You are evaluating the balance sheet for PattyCake’s Corporation. From the balance sheet you find the following balances: cash and marketable securities = $400,000; accounts receivable = $1,200,000; inventory = $2,100,000; ...
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