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Consider a firm with an EBIT of $1014000 The firm finances its assets with $4780000 debt costing 74 percent and 214000 shares of stock selling at $1200 per shareTo reduce risk associated

Consider a firm with an EBIT of $1,014,000. The firm finances its assets with $4,780,000 debt (costing 7.4 percent) and 214,000 shares of stock selling at $12.00 per share. To reduce risk associated with this financial leverage, the firm is considering reducing its debt by $2,640,000 by selling additional shares of stock. The firm is in the 30 percent tax bracket. The change in capital structure will have no effect on the operations of the firm. Thus, EBIT will remain at $1,014,000.

Calculate the EPS before and after the change in capital structure and indicate changes in EPS.

 

May 02 2020 View more View Less

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