Mayr Inc. currently has no debt in its capital structure. It has 50,000 shares outstanding that are selling for $158. The firms expected EBIT is $400,000 and it pays 30% taxes. The managers are considering issuing $2,000,000 in debt. They will have to pay 4.50% interest on these bonds. They plan to use the proceeds of the bond issue to repurchase shares at the current market price. Calculate the EPS of the firm at both the original and relevered capital structures. If they execute the bond issue and share repurchase what will be the increase or decrease in EPS?

EPS will remain the same.

EPS will decrease by $0.26.

EPS will decrease by $1.26.

EPS will decrease by $2.31.

EPS will increase by $0.21.