Question
A firm issues 100,000 shares with a total market value of $5,000,000. The firm's market value of debt is also $5,000,000. The firm is expected
A firm issues 100,000 shares with a total market value of $5,000,000. The firm's market value of debt is also $5,000,000. The firm is expected to generate $1,500,000 in operating income (EBIT). Currently, interest charges are $225,000. Tax rate is 40%. Suppose the firm changes its capital structure which causes (1) total debt to rise by 70%, (2) Number of shares to drop by 70%, (3) Interest expenses to increase by 76%. Assume that both EBIT and share price remain unchanged with this change in capital structure. Calculate the NEW EPS with the change in capital structure.
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