Durbin,Inc. ,is an unlevered firm with a total market value of $380,000 with 20,000 shares of stock outstanding.The firm has expected EBIT of $23,000 if the economy is normal and $30,000 if the economy booms.The firm is considering a bond issue of $85,500 with an attached interest rate of 5.5 percent.The bond proceeds will be used to repurchase shares.The tax rate is 34 percent.What will be the earnings per share after the repurchase if the economy booms?
A)$1.37
B)$1.63
C)$1.08
D)$1.45
E)$1.28

Question

Quizplus · Accepted Answer

Price per share = $380,000/20,000 = $19Number of shares repurchased = $85,500/$19 = 4,500 sharesEPS_Boom = {[$30,000 - (.055 × $85,500)](1 - .34)}/(20,000 - 4,500)= $1.08