Sewer's Paradise is an all equity firm that has 5,000 shares of stock outstanding at a market price of $15 a share.The firm's management has decided to issue $30,000 worth of debt and use the funds to repurchase shares of the outstanding stock.The interest rate on the debt will be 10 percent.What are the earnings per share at the break-even level of earnings before interest and taxes? Ignore taxes.

Question

Quizplus · Accepted Answer

Number of shares repurchased = $30,000/$15 = 2,000EBIT/5,000 = [EBIT - ($30,000 × .0.10)]/(5,000 - 2,000); EBIT = $7,500EPS = [$7,500 - ($30,000 × 0.10)]/(5,000 - 2,000); EPS = $1.50

Sewer's Paradise Is an All Equity Firm That Has 5,000