Changing the capital structure

Problem: Nielson Motors is currently an all equity financed firm. It expects to generate EBIT of $20 million over the next year. Currently Nielson has 8 million shares outstanding and its stock is trading at $20.00 per share. Nielson is considering changing its capital structure by borrowing $50 million at an interest rate of 8% and using the proceeds to repurchase shares. Assume perfect capital markets.

Nielson's EPS if they change their capital structure is closest to:

A. $2.90
B. $2.30
C. $2.50
D. $2.00

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Finance Basics: Changing the capital structure
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