Leeway Brothers has an EPS of $2.25 and a share price of $34.19 and is considering issuing debt to raise funds for a share repurchase. The firm has an effective tax rate of 40 percent. If the firm has $22.5 million in earnings and plans to issue debt at 6.5% to repurchase 300,000 shares, the earnings per share change will be closest to: a. $0.07 b. 0.03 c. (0.04)
EPS now = 2.25 # shares = 22.5 / 2.25 = 10 Million (22.5 - .3 * 34.19 * .065 * (1-.4) ) / ( 10 - .3) = 2.28 so change = +0.03 B
EPS = 2.25 SP = 34.19 NOSO = Earn/EPS NOSO = 22.5/2.25 = 10m shares Cash needed for Repurchase = 300*34.19 = 10257K Interest on Borrowing that money = 10257*0.065*0.60 = 400.023K Total shares after repurchase = 10 - 0.3 = 9.7 (22500 - 400.023)/9.7 22099.977/9.7 = 2278.3481443 Delta = 2.2783481443 - 2.25 = 0.0283481443m = B?
nice guys - B is correct