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Southwest Sands currently has 19,400 shares of stock outstanding. It is considering issuing $89,000 of debt...

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Finance

Southwest Sands currently has 19,400 shares of stockoutstanding. It is considering issuing $89,000 of debt at aninterest rate of 6.2 percent. The break-even level of EBIT betweenthese two capital structure options is $61,000. How many shares ofstock will be repurchased if the company undergoes therecapitalization? Ignore taxes.

Multiple Choice

  • 1,754.90 shares

  • 1,504.20 shares

  • 1,667.16 shares

  • 1,901.15 shares

  • 1,378.85 shares

Answer & Explanation Solved by verified expert
4.4 Ratings (604 Votes)

break-even level of EBIT is the EBIT at which EPS for both the capital structure options is same

Unlevered Levered
a EBIT                61,000                61,000
b Less: Interest (89000*6.2%)                         -                     5,518
c EBT (a-b)                61,000                55,482
d Less: Tax                         -                            -  
e Earnings After Tax (c-d)                61,000                55,482
f Shares outstanding                19,400 N
g EPS (e/f)                     3.14                     3.14

55842/N = 61000/19400

= 3.14432989691

N = 55482/3.14432989691

=  17645.10

Shares bought back = 19400-17645.10

= 1,754.90 shares
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Transcribed Image Text

Southwest Sands currently has 19,400 shares of stockoutstanding. It is considering issuing $89,000 of debt at aninterest rate of 6.2 percent. The break-even level of EBIT betweenthese two capital structure options is $61,000. How many shares ofstock will be repurchased if the company undergoes therecapitalization? Ignore taxes.Multiple Choice1,754.90 shares1,504.20 shares1,667.16 shares1,901.15 shares1,378.85 shares

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