Spreadsheet Problem: Income Statement Consider a firm with an EBITDA of $13,000,000 and an EBIT of $10,500,000. The firm finances its assets with

$50,000,000 debt (costing 6.5 percent, all of which is tax deductible) and 10,000,000 shares of stock selling at $10.00 per share. The firm is considering increasing its debt by $25,000,000, using the proceeds to buy back shares of stock. The firm’s tax rate is 21 percent. The change in capital structure will have no effect on the operations of the firm. Thus, EBIT will remain at $10,500,000. Calculate the change in the firm’s EPS from this change in capital structure. (LG2-1)

D E F After capital structure change $10,500,000 $10,500,000 3,250,000 $75,000,000 x 0.065 = 4,875,000 1 2 EBIT 3 Less: Interest 4 EBT 5 Less: Taxes (21%) 6 Net income Before capital structure change $50,000,000 x 0.065 = 7 Divide by # of shares 8 EPS