A firm issues 100,000 shares of common stock with a total market value of $5,000,000 and...

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A firm issues 100,000 shares of common stock with a total market value of $5,000,000 and an equal amount of debt. The firm is expected to generate $1.5 million in operating income and pay 5% of the debt in interest. If the firm does not pay tax, what will happen to EPS if the firm repurchases $2,500,000 of shares and substitutes an equal amount of additional debt? Suppose that the operating income is expected to become $1.75 million after the change in the capital structure. A firm issues 100,000 shares of common stock with a total market value of $5,000,000 and an equal amount of debt. The firm is expected to generate $1.5 million in operating income and pay 5% of the debt in interest. If the firm does not pay tax, what will happen to EPS if the firm repurchases $2,500,000 of shares and substitutes an equal amount of additional debt? Suppose that the operating income is expected to become $1.75 million after the change in the capital structure.

Answer rating: 100% (QA)

To analyze the impact on earnings per share EPS due to the repurchase of shares and the substitution of additional debt in the capital structure we ne... View the full answer