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The Tanenbaum Tea Company wants to show the stock market an EPS of $3 per share,...

The Tanenbaum Tea Company wants to show the stock market an EPS of $3 per share, but doesn't expect to be able to improve profitability over what is reflected in the financial plan for next year. The plan is partially reproduced below.

Tanenbaum Tea Company
Financial Projection 20X1
($000)
EBIT $18,750 Debt $13,000
Interest (@12%) 1,560                 Equity 97,000
EBT $17,190                 Capital $110,000
Tax (38%) 6,532                
EAT $10,658                 Number of shares = 3,700,000

Tanenbaum's stock sells at book value.

Will trading equity for debt help the firm achieve its EPS goal?

What debt level will produce the desired EPS? Enter your answer in whole thousands. For example, an answer of $1.2 thousand should be entered as 1.2, not 1200. If there is no answer leave the blank field. Do not round intermediate calculations.
$   thousand

Solutions

Expert Solution

Notes-

1.Higher the debt means lower the EPS and lower the debt means higher the EPS. So in our case our EPS is lower than desired so for Increase the EPS we will reduce Debt.

2.All figures are round of upto two digits.

3.Value of debt is in 000 so actual debt will be 7056416.66

jeff jeffy answered 1 year ago
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