BW pic's finance director is considering a change in the company's financing policy. The company has...

  

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BW pic's finance director is considering a change in the company's financing policy. The company has always relied entirely on equity finance but it is now assessing the likely implications of a share buy back to be financed by a bond issue. The company's shares are trading at £4.00 and there are 25 million shares outstanding. It is planned to buy back 5 million shares at the current market price and issue bonds for the same value and paying an interest rate of 6 per cent. The company's earnings before interest and tax is expected to remain at £20 million indefinitely into the future and the tax rate is 40 per cent. Consider the implications of the proposed re-structuring for the expected earnings per share and identify the value of EBIT at which the EPS will be the same following the re- structuring as it was for the all equity financed company, Select one: O a. £6 million Ob. £24 million O c. £18 million O d. £12 million BW pic's finance director is considering a change in the company's financing policy. The company has always relied entirely on equity finance but it is now assessing the likely implications of a share buy back to be financed by a bond issue. The company's shares are trading at £4.00 and there are 25 million shares outstanding. It is planned to buy back 5 million shares at the current market price and issue bonds for the same value and paying an interest rate of 6 per cent. The company's earnings before interest and tax is expected to remain at £20 million indefinitely into the future and the tax rate is 40 per cent. Consider the implications of the proposed re-structuring for the expected earnings per share and identify the value of EBIT at which the EPS will be the same following the re- structuring as it was for the all equity financed company, Select one: O a. £6 million Ob. £24 million O c. £18 million O d. £12 million

Answer rating: 100% (QA)

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