# fm16 7 - =(\$500,000 – \$70,312.5(1-0.40 140,000 =...

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. Answers and Solutions: 16 - 7 c. The number of shares repurchased, X, is: X = (D – D 0 )/P = \$1,004,464.286 / \$16.741 = 60,000.256 60,000. The number of remaining shares, n, is: n = 200,000 – 60,000 = 140,000. Initial position: EPS = NI/n 0 = [(EBIT – Int.)(1-T)] / n 0 = [(\$500,000 – 0)(1-0.40)] / 200,000 = \$1.50. With financial leverage: EPS = [(\$500,000 – 0.07(\$1,004,464.286))(1-0.40)] / 140,000
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Unformatted text preview: = [(\$500,000 – \$70,312.5)(1-0.40)] / 140,000 = \$257,812.5 / 140,000 = \$1.842. Thus, by adding debt, the firm increased its EPS by \$0.342. d. 30% debt: TIE = I EBIT = 5 . 312 , 70 \$ EBIT . Probability TIE 0.10 ( 1.42) 0.20 2.84 0.40 7.11 0.20 11.38 0.10 15.64 The interest payment is not covered when TIE < 1.0. The probability of this occurring is 0.10, or 10 percent....
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