Question

Hastings Company is currently an all equity firm with a total market value of $16,500,000 with 1,200,000 shares of stock outstanding. The firm has expected EBIT of $1,380,000 if the economy is normal and $1,870,000 if the economy booms. The firm is considering a $4,500,000 bond issue with an attached interest rate of 6 percent. The bond proceeds will be used to repurchase shares. Ignore taxes. What will the earnings per share be after the repurchase if the economy is normal?

		$1.69
		$1.56
		$1.44
		$1.36
		$1.27

Answer 1

Answer : Correct Option is 1.27.

Calculation of Earning Per share  after the repurchase if the economy is normal :

Earning Per share = (Earnings available for equity shareholders / Number of shares outstanging after repurchase)

Earnings available for equity shareholders = EBIT if the economy is normal - Interest on Bond Issue

= 1,380,000 - (4,500,000 * 6%)

= 1,380,000 - 270,000

= 1,110,000

Number of shares Outstanding after repurchase = Number of shares outstanding - Number of shares repurchased

Number of shares repurchased = Debt Value / Current Price of stock

Current Price of Stock = Total Market Value / Number of shares Outstanding

= 16,500,000 / 1,200,000

= 13.75

Number of shares repurchased = Debt Value / Current Price of stock

= 4,500,000 / 13.75

= 327272.727272

Number of shares Outstanding after repurchase = 1,200,000 - 327,272.727272

= 872,727.27273

Earning Per share = (Earnings available for equity shareholders / Number of shares outstanging after repurchase)

= 1,110,000 / 872,727.27273

= $1.27