Cross Town Cookies is an all-equity firm with a total market value of $720,000.The firm has 150,000 shares of stock outstanding.Management is considering issuing $200,000 of debt at an interest rate of 7 percent and using the proceeds to repurchase shares.The projected earnings before interest and taxes are $58,600.What are the anticipated earnings per share if the debt is issued? Ignore taxes.

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Quizplus · Accepted Answer

Shares repurchased = $200,000/($720,000/150,000) = 41,666.67 sharesShares outstanding = 150,000 - 41,666.67 = 108,333.33 sharesEPS = [$58,600 - ($200,000 × 0.07)]/108,333.33 = $0.41

Cross Town Cookies Is an All-Equity Firm with a Total