Discuss the change in capital structure

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Reference no: EM131960743

Question: Consider a firm with an EBIT of $862,000. The firm finances its assets with $2,620,000 debt (costing 7.6 percent) and 520,000 shares of stock selling at $6.00 per share. To reduce the firm's risk associated with this financial leverage, the firm is considering reducing its debt by $1,000,000 by selling an additional 320,000 shares of stock. The firm is in the 40 percent tax bracket. The change in capital structure will have no effect on the operations of the firm. Thus, EBIT will remain at $862,000.

Calculate the EPS before and after the change in capital structure and indicate changes in EPS. (Negative answer should be indicated by a minus sign. Round your answers to 5 decimal places.)

EPS Before $__________

EPS After $___________

Difference $__________

Reference no: EM131960743

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