Assume that Anderson Animations Corporation generates annual sales of $1,875,000 using total assets of $500,000, It has an operating profit margin (EBIT/sales) of 45%, a tax rate of 35%, and 100,000 shares of common stock outstanding. These shares have a par value of $5 per share. Currently, the company is financed solely with common stock, but its management is considering selling sufficient debt to bring its debt ratio to 45%. These debt securities, which will carry an interest rate of 15%, will be used to repurchase an equal value of share of common stock, with the shares valued at their par value. Given this information, answer the questions in the following table:
PRESALE INFORMATION
What is the firms current net income?
What is the firms current earnings per share?
POSTSALE INFORMATION
How many shares of common stock will the firm have outstanding if it sells its new debt?
What will be the firms earning per share if it sell the new debt?