Newton Instruments is an unlevered firm with a total market value of $26,200,000
ID: 2656281 • Letter: N
Question
Newton Instruments is an unlevered firm with a total market value of $26,200,000 with 1,400,000 shares of stock outstanding. The firm has expected EBIT of $1,700,000 if the economy is normal and $2,700,000 if the economy booms. The firm is considering a $5,000,000 bond issue with an attached interest rate of 6.3 percent. The bond proceeds will be used to repurchase shares. Ignore taxes. What will the earnings per share be after the repurchase if the economy booms?
$2.32
$2.11
$2.24
$2.45
$2.56
$2.32
$2.11
$2.24
$2.45
$2.56
Explanation / Answer
Per share value = 26.2mil/1.4mil = 18.7143
Number of shares repurchased with debt = 5,000,000/18.7143 = 267,175
Shares remaining = 1400000 - 267175 = 1132855
Interest expense of new debt = 5,000,000 * 6.3% = 315,000
If economy booms, EBIT = 2,700,000
Pretax Income = EBIT - Interest Expense = 2700000 - 315000 = 2,385,000
Since there are no taxes, this is also the net income
EPS = Net income/number of shares
EPS = 2385000/1132855 = 2.1053 = $2.11 (Answer)