Consider a firm with an EBIT of $857,000. The firm finances its assets with $2,570,000 debt (costing 8.2 percent and is all tax deductible) and 470,000 shares of stock selling at $8.00 per share. To reduce the firms risk associated with this financial leverage, the firm is considering reducing its debt by $1,000,000 by selling an additional 270,000 shares of stock. The firms tax rate is 21 percent. The change in capital structure will have no effect on the operations of the firm. Thus, EBIT will remain at $857,000.

Calculate the change in the firms EPS from this change in capital structure.

EPS BEFORE

EPS AFTER

DIFFERENCE