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A firm issues 100,000 equity shares with a total market value of $5,000,000. The firm's market value of debt is also of equal amount, i.e.,
A firm issues 100,000 equity shares with a total market value of $5,000,000. The firm's market value of debt is also of equal amount, i.e., $5,000,000. The firm is expected to generate $1.5 million in operating income and pay $250,000 in interest. Ignoring taxes, this will generate $12.50 earnings per share. What will happen to EPS if the firm's borrowing and interest expense increases by 30% and the number of shares in circulation is cut by 50% (assuming that the share price remains unchanged with this change in capital structure)?
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