Microsoft Word - 2009T2_Fins1613_FinalExam.doc

Blue & Co. is an all-equity firm with a total market value of $230,000. The firm has 25,000 shares of stock outstanding. Management is considering issuing $100,000 of debt at an interest rate of 7 percent and using the proceeds to repurchase shares. Management estimates that the economy will be fairly normal and thus the firm's earnings before interest and taxes (EBIT) will be $60,000. Assume the share price remains constant and ignore taxes. What is the anticipated earnings per share (EPS) if the debt is issued?