Gabella's is an all-equity firm that has 21,000 shares of stock outstanding at a market price of $40 a share. The firm has earnings before interest and taxes of $84,000 and has a 100 percent dividend payout ratio. Ignore taxes. Gabella's has decided to issue $160,000 of debt at a rate of 12 percent and use the proceeds to repurchase shares. Terry owns 400 shares of Gabella's stock and has decided to continue holding those shares.

Using the information provided, you are required to answer the following questions:

a) What are Gabella's earnings per share before its debt issue? Show your calculations.

b) What is Terry's total annual dividend income before Gabella's debt issue? Show your calculations.

c) What are Gabella's earnings per share after its debt issue? Show your calculations.

d)How will Gabella's debt issue affect Terry's total annual dividend income? Show your calculations.

Answer rating: 100% (QA)

a Earnings per share net incomeaverage outstanding common shares ... View the full answer