Question

Southwest Sands currently has 24,000 shares of stock outstanding. It is considering issuing $140,000 of debt at an interest rate of 7.7 percent. The break-even level of EBIT between these two capital structure options is $78,000. How many shares of stock will be repurchased if the company undergoes the recapitalization

Answer 1

The amount of shares repurchased will be 3,316.92 shares.

Step-by-step explanation:

In order to know how many shares of stock will be repurchased if the company undergoes the recapitalization, we first have to calculate the New No. of Shares. We have to use the following formula:

[EBIT/Original No. of Shares] = [(EBIT - Interest) / New No. of Shares]

[$78,000 / 24,000] = [{$78,000 - ($140,000 x 0.077)} / X]

$3.25 = $67,220 / X

X = $67,220 / $3.25 = 20,683.08 . New No. of Shares.

Hence Shares Repurchased = Original No. of Shares - New No. of Shares

= 24,000 - 20,683.08 = 3,316.92 shares