The Grist Mill has no debt.The firm has a total market value of $245,000 with 10,000 shares of stock outstanding.The firm has expected EBIT of $14,000 if the economy is normal and $17,000 if the economy booms.The firm is considering a bond issue of $49,000 with an attached interest rate of 8 percent.The bond proceeds will be used to repurchase shares.The tax rate is 34 percent.Compute the EPS after the repurchase for both a normal and a boom economy.What is the percentage increase in EPS if the economy booms rather than being normal?
A)18.78%
B)21.42%
C)19.84%
D)29.76%
E)19.29%

Question

Quizplus · Accepted Answer

Price per share = $245,000/10,000 = $24.50Number of shares repurchased = $49,000/$24.50 = 2,000 sharesEPS_Normal = {[$14,000 - (.08 × $49,000)](1 - .34)}/(10,000 - 2,000)= $.8316EPS_Boom = {[$17,000 - (.08 × $49,000)](1 - .34)}/(10,000 - 2,000)= $1.0791Percentage increase in EPS = ($1.0791 - .8316)/$.8316 = .2976,or 29.76%

The Grist Mill Has No Debt