A Firm Issues 100,000 Equity Shares with a Total Market

question 9

Multiple Choice

A firm issues 100,000 equity shares with a total market value of $5,000,000. The firm's market value of debt is also of equal amount . The firm is expected to generate $1.5 million in operating income and pay $250,000 in interest. Ignoring taxes, this will generate $12.50 earnings per share. What will happen to EPS if the firm's borrowing and interest expense increases by 50% and the number of shares in circulation is cut by 50% (assuming that the share price remains unchanged with this change in capital structure) ?

• A) EPS decreases to $10.00.
• B) EPS decreases to $11.67.
• C) EPS increases to $15.00.
• D)EPS increases to $22.50.