Calculate the earnings per share

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Question - As Chief Financial Officer of the ABC Corporation, you are considering a recapitalisation plan that would convert ABC from its current all-equity capital structure to one including substantial financial leverage. ABC now has 1,000,000 ordinary shares outstanding, which are selling for $60 each, and you expect the company's EBIT to be $5,800,000 per year for the foreseeable future. The recapitalisation proposal is to issue $24,000,000 worth of long-term debt at an interest rate of 5.0% and use the proceeds to repurchase 400,000 ordinary shares worth $24,000,000. Assuming there are no market frictions such as corporate or personal income taxes, calculate the earnings per share and the expected return on equity for ABC shareholders under both the current all-equity capital structure and under the recapitalisation plan.

Reference no: EM133013216

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