ABC Corporation has a capital structure that consists of $20 million in debt and $40 million in equity. The debt has a coupon rate of 10%, while the industry return on equity is 15%. ABC Corporation is unsure of the state of the economy in the next year. The tax rate facing the company is 40%.

-Refer to ABC Corporation.Given the information in the table,what is the expected earnings per share if the company has 1 million shares outstanding?

Question

ABC Corporation has a capital structure that consists of $20 million in debt and $40 million in equity. The debt has a coupon rate of 10%, while the industry return on equity is 15%. ABC Corporation is unsure of the state of the economy in the next year. The tax rate facing the company is 40%.
 
-Refer to ABC Corporation.Given the information in the table,what is the expected earnings per share if the company has 1 million shares outstanding?

Quizplus · Accepted Answer

Interest payment = $20*.10 = $2 million
NI (bad)= ($2-$2)*(1-.4)= $0
NI (good)= ($5-$2)*(1-.4)= $1.8 million
NI (great)= ($10 - $2)*(1-.4)= $4.8 million
Expected EPS = ($0*.4+$1.8*.4+$4.8*.2)/1 = $1.68

ABC Corporation Has a Capital Structure That Consists of $20