Skyrocket Electronic Company (SEC) is an all-equity firm. The number of ordinary shares outstanding is 1,000,000, which are currently selling for $30 each. The firm’s Earnings Before Interest and Taxes (EBIT) is expected to be $3,600,000 per year for the foreseeable future. The company’s current earning per share is $3.60. The management of the firm is considering a recapitalization plan to include financial leverage in its capital structure. The recapitalization proposal involves issuing long-term debt at an interest rate of 6% and using the whole proceed in re-purchasing its ordinary shares at its current market price. The sole objective of this recapitalization plan is to increase its EPS by 50% (i.e., from $3.60 to $5.40). As a financial analyst you have been approached by the management of SEC Company to determine the debt-equity ratio that will help the company achieve its EPS target (Assume the company does not pay any tax). Specifically, you are required to compute the following:

(a) Number of shares to be re-purchased to achieve the target EPS

(b) The amount of long-term debt to be issued to achieve the target EPS

(c) The target Debt/Equity ratio

Answer rating: 100% (QA)

Skyrocket Electronic Company Recapitalization Step 1 Calculate Current Total Equity Number of shares ... View the full answer