Popeye's is currently unlevered with 2,000 shares outstanding and assets valued at $50,000. The company expects operating income in the current period to be $6,000. Suppose that the company can exchange 400 shares of stock for $10,000 in debt paying 10% interest. From the standpoint of EPS, how would the exchange be wise, assuming no taxes.
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EPS is calculated as Earnings After Taxes/No. of shares outstanding. In the unlevered state, the earnings are $6,000 and since there are no taxes, earnings after ...
The solution explains how to calculate the effect on EPS of exchanging shares for debt.