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Chapter 15 Homework Fresh out of college, Joe Walker, the new CFO of Joe's Southern Cornbread Company, wants to shake things up at the sleepy
Chapter 15 Homework Fresh out of college, Joe Walker, the new CFO of Joe's Southern Cornbread Company, wants to shake things up at the sleepy little food company headquartered in Milwaukee, Wisconsin. The firm is currently an all-equity rm because "that's the way we've always done it." Under pressure from a new group of major stockholders, however, Walker is considering acquiring some debt (leverage) in an effort to boost earnings per share. The company currently has 600 shares, but he is thinking about borrowing $6,000 at 10% per year and buying back 200 of those shares. A. What is the EBIT that would make the choice between his options (all equity or include leverage) indifferent. (break even EBIT). B. What are the unleveraged and leveraged EPSs (Earnings per Share) if EBIT were $4,000 and tax rate is 40%? Use the following table EPS Calculation No Debt Include Leverage EBIT Interest EBT Taxes Net Income # of Shares EPS
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