OPY is currently an all-equity firm. It expects to generate earnings before interest and taxes (EBIT) of $24 million over the next year. Currently, OPY has 15 million shares outstanding, and its stock is trading for a price of $8.00 per share. OPY is considering changing its capital structure by borrowing $32 million at an interest rate of 9% and using the proceeds to repurchase 4 million shares at $8.00 per share. Suppose OPY has no debt and there are no interest and no taxes.

a. What would OPY's earnings per share be without leverage?

 
b. Calculate OPY's earnings per share after recapitalization?

c. Assume OPY's EBIT is not expected to grow in the future and all earnings are paid as dividends. Use MM proposition that the increase in expected EPS for OPY will not lead to an increase in the share price?

Answer rating: 100% (QA)

ANSWER IS To calculate the earnings per share EPS before and after the recapitalization we need to c... View the full answer