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1) Groom Corporation had net income of $415,000 for the year ended December 31, 2001
1) Groom Corporation had net income of $415,000 for the year ended December 31, 2001. On January 1, 2001, there were 90,000 common shares issued. Preferred dividends of $70,000 were declared and paid during 2001.
Calculate earnings per share for Groom Corporation for the year ended December 31, 2001.
2) Wealth and Health Company is financed entirely by common stock that is priced to offer a 15 percent expected return.The common stock price is $40/share. The earnings per share (EPS) is expected to be $6. If the company repurchases 25 percent of the common stock and substitutes an equal value of debt yielding 6 percent, what is the expected value of earnings per share after refinancing? (Ignore taxes.)
Expert Solution
1) Computation of the earnings per share (EPS):-
EPS = (Net income - Preferred dividends) / Number of common shares
= ($415,000 - $70,000) / 90,000
= $345,000 / 90,000
= $3.83 per share
2) Computation of the expected value of earnings per share after refinancing:-
Earnings after interest = EPS - Interest on debt
= $6 - ($40*25%*6%)
= $6 - $0.60
= $5.40
Earnings per share after refinancing = Earnings after tax / (1 - 25%)
= $5.40 / 75%
= $7.20 per share
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