Question
1.Cummings Corporation has no debt outstanding and a total market value of $200,000.Earnings before interest and taxes are projected to be $20,000.The CEO is considering
1.Cummings Corporation has no debt outstanding and a total market value of $200,000.Earnings before interest and taxes are projected to be $20,000.The CEO is considering a $50,000 debt issue with an interest rate of 5%.The proceeds will be used to repurchase shares of stock.There are currently 5,000 shares outstanding.Ignore taxes.
a)Calculate earnings per share, EPS, before any debt is issued
b)Assume we recapitalize.What is the new EPS?
c)What is the break-even EBIT?
d)At the breakeven EBIT, all else equal, what is the EPS for the firm when it is debt free; what is the EPS after it takes on debt?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started
Foundations of Financial Management
Authors: Stanley Block, Geoffrey Hirt, Bartley Danielsen, Doug Short, Michael Perretta
10th Canadian edition
1259261018, 1259261015, 978-1259024979
