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Cross City Tunnel (CCT) Ltd currently has 5 million shares on issue each with a market...

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?

Important: please show the formulas. Please explain thoroughly your calculations and answers.

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Expert Solution

Therefore EPS under current capital structure is $0.42 per share and under proposed capital structure is $0.373 per share. Therefore current capital structure is preferable as EPS under current capital structure is greater than compared to proposed capital structure.

jeff jeffy answered 1 year ago
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