Question

4. Cross City Tunnel (CCT) Ltd currently has 5 million shares on issue each with a market price of $2.50. CCT also has $7 million of debt. The Chief Financial Offer is considering changing the capital structure by repaying $3 million of debt using funds raised from an equity issue. The interest rate on debt is 10% p.a. and the company tax rate is 30%.

   Calculate EPS for both the current and the proposed capital structures at a projected EBIT level of $3.7 million. Which capital structure is preferable if this is the expected level of EBIT?

Answer 1

Calculation of EPS
	Current	Proposed
EBIT	3,700,000	3,700,000
Less: Interest	700,000	400,000
Earnings before tax	3,000,000	3,300,000
Less: Tax	900,000	990,000
Net Income	2,100,000	2,310,000
Number of Shares	5,000,000	6,200,000
EPS	0.42	0.372580645
Hence, current structure is preferable since higher EPS