Question

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?

** no excel please! please show all work - thank you!

A) 43.24 percent

B) 38.80 percent

C) 53.92 percent

D) 41.26 percent

E) 50.45 percent

Answer 1

After recapitalisation:				Share price	$ 33.60	245000/10000
	Normal	Expansion
EBIT	$ 16,000	$          20,800	=16000*(1+30%)
Less: Interest	$    4,900	$            4,900	=70000*7%
Profit before tax	$ 11,100	$          15,900
Less: Tax @ 34%	$    3,774	$            5,406
Net income	$    7,326	$          10,494
Number of shares	417	417	10000-49000/24.5
EPS	$    17.58	$            25.19
% change in EPS		43.24%	(25.19-17.58)/17.58

Hence, correct option is A) 43.24 percent