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Consider a firm with an EBIT of $11,300,000. The firm finances its assets with $51,600,000 debt (costing 7.3 percent) and 10,800,000 shares of stock selling at $8.00 per share. The firm is considering increasing its debt by $25,800,000, using the proceeds to buy back 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 $11,300,000.
Calculate the EPS before and after the change in capital structure and indicate changes in EPS. (Round your answers to 3 decimal places.)
EPS before $_________
EPS after $__________
Difference $__________
Young Corporation expects an EBIT of $ 16,000 every year forever. The company currently has no debt, and its cost of equity is 15 percent.
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