Question

ABC Corp. is currently all equity, and they have EBIT of $341,154. They currently have 7,138 shares outstanding, with a share price of 279. What will their EPS be if they move to a 50% equity capital structure? Their cost of debt is 0.07.

Answer 1

Earnings Before Interest and Tax = 341,154

Assuming no interest cost and no taxes, all the income is distributed to the shareholders.

Earnings per share = earnings / no. of shares outstanding

Earnings per share = 341,154 / 7138

Earnings per share = 47.79

Market Value of Equity = No. of Shares Outstanding * market price of shares

Market Value of Equity = 7138*279 = 1,991,502

Now, assuming we have 50% equity in the capital structure. This means we raise amount via debt and reduce equity through repurchase or buyback of shares

Now no. of shares outstand = 7138 * 50% = 3569 shares

MV of Equity = 3659 * 279

MV of Equity = 995,751

Debt Raised = 995,751

Total Capital remains same at 1,991,502

Interest Cost = 995,751*7% = 69,702.57

Assuming no taxes,

Earnings attributable to shareholders = EBIT - Interest Cost

Earnings attributable to shareholders = 341,154 - 69,702.57 = 271,451.43

Earnings Per Share with new capital structure = Earnings / No. of shares outstanding

Earnings Per Share with new capital structure = 271,451.43 / 3569

Earnings Per Share with new capital structure = 76.06

Earnings Per Shares have risen due to use of debt in capital structure