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Boston Lumber is unlevered with 175 shares outstanding and earnings before interest and taxes, or EBIT, of 725. Corporate earnings are taxed at a rate
Boston Lumber is unlevered with 175 shares outstanding and earnings before interest and taxes, or EBIT, of 725. Corporate earnings are taxed at a rate of 37%. Suppose that Boston Lumber makes a decision to partition its assets into debt and equity by using the newly raised debt capital to buy back a portion of the stock. The firm issues $2250 of debt at a cost of 8.85%. The partition does not change EBIT but reduces the number of shares outstanding to 100. Which of the following is Boston Lumber's EPS after the partition?
$1.89
$7.25
$3.31
$2.61
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