Reduce the firm risk associated with financial leverage

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Reference no: EM131880386

Consider a firm with an EBIT of $860,000. The firm finances its assets with $2,600,000 debt (costing 7.4 percent) and 500,000 shares of stock selling at $5.00 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 300,000 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 $860,000. Calculate the EPS before and after the change in capital structure and indicate changes in EPS. Negartive answers should be indicated by a minus sign. Round your answers to 5 decimal places.

EPS before:

EPS after:

Difference:

Reference no: EM131880386

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