Durbin,Inc. ,is an unlevered firm with a total market value of $365,000 with 20,000 shares of stock outstanding.The firm has expected EBIT of $24,000 if the economy is normal and $28,000 if the economy booms.The firm is considering a $73,000 bond issue with an attached interest rate of 5.5 percent.The bond proceeds will be used to repurchase shares.Ignore taxes.What will the earnings per share be after the repurchase if the economy booms?
A)$1.50
B)$1.61
C)$1.47
D)$1.75
E)$1.68

Question

Quizplus · Accepted Answer

Price per share = $365,000/20,000 = $18.25Number of shares repurchased = $73,000/$18.25 = 4,000 sharesEPS_Boom = [$28,000 - (.055 × $73,000)]/(20,000 - 4,000)= $1.50