Cross town cookies is an all-equity firm with a total market value of $4,187,100. the firm has 127,500 shares of stock outstanding. management is considering issuing $300,000 of debt at an interest rate of 6 percent and using the proceeds to repurchase shares. the projected earnings before interest and taxes are $215,600. what are the anticipated earnings per share if the debt is issued? ignore taxes. (round the number of shares repurchased down to the nearest whole share.)

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Business

Eliza Blankenship

14 October, 14:56

Cross town cookies is an all-equity firm with a total market value of $4,187,100. the firm has 127,500 shares of stock outstanding. management is considering issuing $300,000 of debt at an interest rate of 6 percent and using the proceeds to repurchase shares. the projected earnings before interest and taxes are $215,600. what are the anticipated earnings per share if the debt is issued? ignore taxes. (round the number of shares repurchased down to the nearest whole share.)

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Jaquan Fernandez · Answer 1

The solution for the problem is:

You first get the shares repurchased = 300,000 / (4,187,000/127,500) = 9,135.42 shares

And then followed by the shares outstanding = 127,000 - 9,135.42 = 117,864.58 shares

Now you can compute for the EPS = [215,600 - (300,000 * 0.06) / 117,864.58 = $1.68