Question
In: Finance
North Side has no debt and a market value of $175,000. EBIT projects to be $16,000...
North Side has no debt and a market value of $175,000. EBIT projects to be $16,000 under normal economic conditions. In a strong economic expansion, EBIT will be 30% higher. The company is considering a $70,000 debt issue with a 7% interest rate to repurchase stock. There are currently 2,500 shares outstanding, and the tax rate is 34%. What will the percentage change in EPS be if the economy has a strong expansion?
ANSWER IS 43.24% please show explanation and work to get to this answer. Thank you!
Solutions
Expert Solution
| Normal | Expansion | |
| EBIT | 16,000 | 20,800 |
| Less: Interest | 4,900 | 4,900 |
| Income before tax | 11,100 | 15,900 |
| Less: Taxes | 3,774 | 5,406 |
| Net Income | 7,326 | 10,494 |
| Number of shares | 1,500 | 1,500 |
| EPS | 4.88 | 7.00 |
| % change = (7-4.88)/4.88 | 43.24% | |
| Value per share = 175000/2500 = $70 | ||
| Number of shares repurchased = 70000/70 = 1000 shares | ||
Hence, the answer is 43.24%
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