Question

ABC Corp. is currently all equity, and they have EBIT of $358,725. They currently have 9,534 shares outstanding, with a share price of 265. What will their EPS be if they move to a 50% equity capital structure? Their cost of debt is 0.05.

Answer 1

- EBIT = $358,725

Market value of equity = No of shares outstanding*Market price

= 9534*$265

= $2,526,510

- ABC corp moved to 50% equity capital structure from the existing all equity capital structure by repurchasing the 50% existing shares.

As Equity is 50% in new Capital structure the other 50% is debt

So, Value of Debt = $2526,510*50%

= $1263,255

Interest expenses = Value of Debt*Cost of Debt

= $1263,255*0.05

= $63,162.75

- No of shares after moving to a 50% equity capital structure = 9534*50%

= 4767

Net income = EBIT - Interest Expenses (Note- Ignoring taxes as not given)

= $358,725 - $63,162.75

Net income = $295,562.25

EPS = Net Income/No of shares after change in capital structure

= $295,562.25/4767 shares

EPS = 62 per share