Top Down is a levered firm with assets valued at $300,000, has $75,000 of debt issued at 7% interest, and 5,000 shares of stock outstanding. Suppose that earnings before interest and tax (EBIT) is $11,000 and that corporate profits are subject to a tax rate of 25%. Which of the following comes closest to the EPS of Top Down?
a.
$1.31
b.
$1.17
c.
$4.20
d.
$0.00
e.
$0.86
Solution
Answer= e. $0.86
.
Top Down is a levered firm with assets valued at $300-000- has $75-000.docx
1. Top Down is a levered firm with assets valued at $300,000, has $75,000 of debt issued at 7%
interest, and 5,000 shares of stock outstanding. Suppose that earnings before interest and tax
(EBIT) is $11,000 and that corporate profits are subject to a tax rate of 25%. Which of the
following comes closest to the EPS of Top Down?
a.
$1.31
b.
$1.17
c.
$4.20
d.
$0.00
e.
$0.86
Solution
Answer= e. $0.86
Calculation of EPS( Earning per
share)
Particulars Amount in $
Earnings before interest and tax
(EBIT)
11000.00
Less
2. Interest on debt @7% on $75000 5250.00
Earning after interest and before tax 5750.00
Less-25% taxes on $5750 1437.50
Profit after taxes 4312.50
Number of share outstanding 5000
Earning per share Profit after taxes/ number of outstanding shares
Earning per share 0.86