Blackstone, Inc. is currently an all equity ﬁrm that has 65,000 shares of stock outstanding at a market price of $22 a share. The ﬁrm has decided to leverage its operations by issuing $605,000
Of debt at an interest rate of 6.5%. This new debt will be used to repurchase shares of the
Outstanding stock. The restructuring is expected to increase the earnings per share. What is the
Minimum level of earnings before interest and taxes that Blackstone is expecting? Ignore taxes.

Question

Quizplus · Accepted Answer

The correct answer is A because the minimum level of earnings before interest and taxes that Blackstone is expecting is $92,950. This is calculated by taking the interest expense on the new debt ($605,000 * 6.5% = $39,325) and adding it to the current earnings per share ($22 * 65,000 = $1,430,000) and dividing by the new number of shares outstanding (65,000 - $605,000/$22 = 55,000).