Assume an unlevered firm has total assets of $6,000,earnings before interest and taxes of $600,and 500 shares of stock outstanding.Further assume the firm decides to change 40 percent of its capital structure to debt with an interest rate of 8 percent.Ignore taxes.What will be the amount of the change in the earnings per share as a result of this change in the capital structure?
A)$.16
B)$.09
C)No change
D)−$.09
E)−$.16

Question

Quizplus · Accepted Answer

The correct answer is A because the change in the capital structure will increase the firm's earnings per share. The firm will now have $2,400 of debt and $3,600 of equity. The interest expense on the debt will be $192, which will reduce the firm's earnings before interest and taxes to $408. However, the firm will now have only 300 shares of stock outstanding, so the earnings per share will increase to $1.36.

Assume an Unlevered Firm Has Total Assets of $6,000,earnings Before