Dexter's Is an Unlevered Firm with a Total Market Value

question 32

Multiple Choice

Dexter's is an unlevered firm with a total market value of $348,000 with 20,000 shares of stock outstanding.The firm has expected EBIT of $27,500 if the economy is normal and $32,000 if the economy booms.The firm is considering a bond issue of $69,600 with an attached interest rate of 6 percent.The bond proceeds will be used to repurchase shares.The tax rate is 35 percent.Compute the EPS after the repurchase for both a normal and a boom economy.What is the percentage increase in EPS if the economy booms rather than being normal?

• A)18.78%
• B)21.42%
• C)19.84%
• D)20.28%
• E)19.29%