Answer to Question #67679 in Accounting for virlesh

Question

ABC Corp Ltd has 10 million shares and $600,000 of debt (issues bonds @ 7% p.a.). EBIT is projected to be $3 million. The company tax rate is 20%.Preference shares pay an annual dividend of $100,000. Management is considering two options for capital restructure:
Option 1: The Company would borrow $3.5 million at 8% interest rate and use the proceeds to engage in share repurchase program for 3.5 million shares at the current market price of $1.
Option 2: Company can raise $3.5 million by issuing new shares at the current market price of $1.
Required:
a) What is the current EPS for shareholders? (5 marks)
b) What will be the EPS after the change in capital structure under option 1 and option 2? Hint: show full working from EBIT to Net Profit (12 marks)

Answer 1

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