The change in capital structure will have no effect on the, Financial Management

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The change in capital structure will have no effect on the

Consider a firm with an EBIT of $569,000. The firm finances its assets with $1,190,000 debt (costing 6.3 percent) and 219,000 shares of stock selling at $18.00 per share. The firm is considering increasing its debt by $900,000, using the proceeds to buy back 94,000 shares of stock. The firm is in the 40 percent tax bracket. The change in capital structure will have no effect on the operations of the firm. Thus, EBIT will remain at $569,000.

Calculate the EPS before and after the change in capital structure and indicate changes in EPS.

EPS Before

EPS After

Difference

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