Question:
Hubball Resources has the following capital structure:
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Debt at 8% $300,000
Common stock $10 per(shares50,000) $500,000
Total $800,000
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a. Compute earnings per share if earnings before interest and taxes is $64,000. (Assume a 20 percent tax rate.)
b. Assume debt goes up by $200,000, common stock goes down by $200,000, and the interest rate on the new debt is 10 percent. The tax rate remains at 20 percent. The par value on the common stock is still $10. Compute earnings per share if earnings before interest and taxes is $80,000.