Question

Paradise Travels is an all-equity firm that has 9,000 shares of stock outstanding at a market price of $27 a share. Management has decided to issue $25,000 worth of debt and use the funds to repurchase shares of the outstanding stock. The interest rate on the debt will be 7.3 percent. What are the earnings per share at the break-even level of earnings before interest and taxes

Answer 1

Answer:

$1.97

Explanation:

EBIT/9,000 = [EBIT - $25,000*(0.073)] / [9,000 - ($25,000 / $27)]

EBIT / 9,000 = [EBIT - $1,825] / 8074.07

EBIT = $17,739

EPS = [EBIT - $25,000*(0.073)] / [9,000 - ($25,000 / $27)]

EPS = [$17,739 - $25,000*(0.073)] / [9,000 - ($25,000 / $27)]

EPS = $1.97

Answer 2

The earnings per share  of Paradise travels Co. will be $1.97 at the break-even level of the Earnings Before Interest And Taxes (EBIT). These earnings are ascertained  by using the appropriate formula.

The correct formula to calculate the earnings per share of the firm can be calculated as the relevant information has been given to us were no. of share outstanding are 9000 whose market price prevails at $27.

• The formula to calculate the earnings per share is as calculated by dividing the total earnings of the firm by the total no. of shares outstanding at the end of the company. It can be shown as below

$\rm Earnings\ Per\ Share = \dfrac{Net\ Earnings}{No.\ of\ Shares\ Outstanding}$

• The face value of the shares is not given here in the equation so we'll have to calculate EBIT before to move further using the following formula.

$\rm EPS= \dfrac{EBIT}{No.\ Of\ Shares\ Outstanding}- \rm \dfrac{EBIT- Loan\ Raised\ x\ Interest\ Rate }{No.\ of\ Share- Expected\ Value\ of\ Shares}$

Putting the values in the formula we get,

$\rm EPS= \dfrac{17739}{9000} - \dfrac{17739-25000\ x\ 0.073 )}{9000-\frac{25000}{0.073} )}$

Continuing further,

$\rm EPS= \dfrac{17739}{9000} - \dfrac{17739-1825}{9000-925}$

• We get

$\rm EPS= 1.97$

Therefore the earnings of the Paradise Travels is $1.97 per share.

Hence, we have found that EPS of Paradise Travels is $1.97

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