EBIT – EPS analysisA firm has 9k shares of equity outstanding and a market
price of $100. The company does not have any debt and management is looking at
2 alternative recapitalization plans. The 1st one calls for issueing $200k of
debt. The 2nd calls for issuing $400k of debt. The proceeds from the issuance
would be used to purchase equity shares at market price. The cost of debt is 8%
per year and ht ecompany does not pay any taxes.1: If EBIT is equal to $100k what would EPS be under each of
the two plans? What does it confirm?
2: If EBIT is either $90k or $150k what would be the
company’s EPS at both levels for the 2 refinancing plans? If both income
possibilities are equally likely so that the expected EBIT is $130k what would
be the EPS?