A small retailer is considering the advantages of adding debt to the business capital structure. Currently, $400,000 of assets have been financed entirely with 20,000 shares of common stock. The retailer is considering repurchase of 50% of the equity using proceeds from a bond issue that will require payment of 10% coupon interest. EBIT is projected to be $88,000 for next year, and the applicable corporate income tax rate is 40%.

a. Calculate earnings per share under the current all-equity financing and under the bond issue alternative.

b. Calculate EPS given an 80% repurchase. Should the retailer be encouraged to take on a higher debt-equity ratio?