An all-equity firm has 1 million shares outstanding with a market value of $10 million.It does not pay tax and has an operating income of $1.5 million.If $2 million of 10% debt is issued and the proceeds used to repurchase shares of stock,then the firm's EPS:

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Quizplus · Accepted Answer

Initially EPS = $1.5 million / 1 million = $1.5After restructuring VE = $800,000; number of shares = 800,000; net income = $1.5 million − 0.10 × $2 million = $1.3 million; EPS = $1.3 million / 800,000 = $1.63

An All-Equity Firm Has 1 Million Shares Outstanding with a Market