Consider a firm with an EBIT of $1,012,000. The firm finances its assets with $4,740,000 debt (costing 7.2 percent) and 212,000 shares of stock selling at $14.00 per share. To reduce risk associated with this financial leverage, the firm is considering reducing its debt by $2,660,000 by selling additional 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 $1,012,000.

The question is missing requirement below:

Calculate the EPS before and after the change in capital structure and indicate changes in EPS. (Negative answer should be indicated by a minus sign. Round your answers to 2 decimal places.) EPS before $ EPS after $ Difference $.

The EPS before change in capital structure is $1.90 per share and $1.29 per share after the change in capital structure,hence there is a drop of $0.61 per share in EPS as a result of increase in the number of shares emanating from fresh issue of shares.

Explanation:

EPS gives an indicator of the amount of earnings after tax and interest that each ordinary share is entitled to in a year.

Earnings tells us how much a company has per share to pay dividends and reinvest in the business since internal finance is the cheapest form of finance.

EPS is calculated as total earnings attributable to ordinary shareholders divided weighted average number of shares as shown in the attached spreadsheet

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