The directors of Palladium Limited have stated in the company's latest financial report that they believe the company's ideal target capital structure should be:

To achieve this target, the company would maintain the same total capital employed and either issue new shares and reduce debt, or buy back the shares and increase debt, whichever is necessary. They do not expect that either the share price or the cost of borrowing would be affected.

The current capital structure of Palladium Limited at 31 August 2019 consisted of the following:

Palladium Limited has 500 000 8% preference shares available to issue. The nominal value is R14 per share whilst they are expected to be sold for R24 per share on the Johannesburg Stock Exchange.

Equity

60%

Debt

30%

Preference shares

10%

Ordinary shares:

80 000 shares with a par value of R30 per share. These shares are currently trading at R45 per share.

Debt:

The company has R12 000 000 in debt, with an interest rate of 8%.

The directors have forecast that profits before interest and tax of R30 000 000 will be achieved in the forthcoming financial year unless there is further depreciation in the Rand due to a potential downgrade by the ratings agencies which would increase their operating costs, in which case they expect the profit to decline by a quarter (14). Taxes are calculated at 28%.

Required:

Q.2.1

Calculate the earnings per share (EPS) using the target capital structure under downturn conditions only.