A Firm Issues 100,000 Shares of Common Stock with a Total

question 28

Multiple Choice

A firm issues 100,000 shares of common stock with a total market value of $5,000,000 and an equal amount of debt.The firm is expected to generate $1.5 million in operating income and pay $250,000 in interest.If the firm does not pay tax,what will happen to EPS if the firm repurchases $2,500,000 of shares and substitutes an equal amount of additional debt?

• A) EPS decreases by 33.3% to $10.00.
• B) EPS decreases by 6.7% to $11.67.
• C) EPS increases by 20% to $15.00.
• D) EPS increases by 80% to $22.50.

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