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Southwest Sands currently has 19,800 shares of stock outstanding. It is considering issuing $92,000 of debt...

Southwest Sands currently has 19,800 shares of stock outstanding. It is considering issuing $92,000 of debt at an interest rate of 6.3 percent. The break-even level of EBIT between these two capital structure options is $62,000. How many shares of stock will be repurchased if the company undergoes the recapitalization? Ignore taxes.

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Expert Solution

At break-even level of EBIT, EPS under both the situations will be the same.

Unlevered Levered
a EBIT            62,000                62,000
b Less: Interest (92000*6.3%)                     -                    5,796
c EBT (a-b)            62,000                56,204
d Less: Tax                     -                           -  
e Earnings After Tax (c-d)            62,000                56,204
f Shares outstanding*            19,800 X
g EPS (e/f)                 3.13 56204/X

62000/19800 = 56204/X

X = (56204*19800)/62000

= 17949.0193548

Stock Outstanding under levered scheme =  17949

Stocks to be repurchase = 19800-17949

= 1851

jeff jeffy answered 1 year ago
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