LT Transport is an unlevered firm with a total market value of $672,000 and 50,000 shares of stock outstanding.The firm has expected EBIT of $64,500 if the economy is normal and $73,000 if the economy booms.The firm is considering a bond issue of $33,600 with an attached interest rate of 7.6 percent.The bond proceeds will be used to repurchase shares.The tax rate is 34 percent.What is the percentage increase in EPS if the economy booms rather than be normal?
A)10.78%
B)11.42%
C)12.84%
D)10.28%
E)13.72%

Question

Quizplus · Accepted Answer

Price per share = $672,000 / 50,000 = $13.44 Number of shares repurchased = $33,600 / $13.44 = 2,500 shares EPS_Normal = {[$64,500 - (0.076 × $33,600)](1 - 0.34)} / (50,000 - 2,500)= $0.8607 EPS_Boom = {[$73,000 - (0.076 × $33,600)](1 - 0.34)} / (50,000 - 2,500)= $0.9788 %Δ in EPS = ($0.9788 - 0.8607)/ $0.8607 = 0.1372,or 13.72%

LT Transport Is an Unlevered Firm with a Total Market