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Simone's Sweets is an all-equity firm that has 12,100 shares of stock outstanding at a market...

Simone's Sweets is an all-equity firm that has 12,100 shares of stock outstanding at a market price of $19 per share. The firm's management has decided to issue $128,000 worth of debt at an interest rate of 8 percent. The funds will be used to repurchase shares of the outstanding stock. What are the earnings per share at the break-even EBIT? Multiple Choice $4.13 $3.72 $1.52 $2.73 $3.43

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Expert Solution

At the break-even EBIT, EPS under both option is same.

Let X be the break-even EBIT

All equity Levered
a EBIT X X
b Less: Interest (128000*8%)                         -                       10,240
c EBT (a-b) X X-10240
d Less: Tax                         -                                -  
e Earnings After Tax (c-d) X X-10240
f Shares outstanding*                12,100                       5,363
g EPS (e/f) X/12100 (X-10240)/5363

X/12100 = (X-10240)/5363

5363X =  (X-10240)*12100

= 12100X-123904000

12100X - 5363X = 123904000

6737X = 123904000

X = 123904000/6737

= 18392

EPS = 18392/12100

= $1.52

jeff jeffy answered 1 year ago
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