Miller's Dry Goods is an all equity firm with 48,000 shares of stock outstanding at a market price of $50 a share.

Sewer's Paradise is an all equity firm that has 5,000 shares of stock outstanding at a market price of $15 a share. The firm's management has decided to issue $30,000 worth of debt and use the funds to repurchase shares of the outstanding stock. The interest rate on the debt will be 10 percent. What are the earnings per share at the break-even level of earnings before interest and taxes? Ignore taxes.    A.  $1.46 B.  $1.50 C.  $1.67 D.  $1.88 E.  $1.94 Number of shares repurchased = $30,000/$15 = 2,000 EBIT/5,000 = [EBIT - ($30,000 × .0.10)]/(5,000 - 2,000); EBIT = $7,500 EPS = [$7,500 - ($30,000 × 0.10)]/(5,000 - 2,000); EPS = $1.50

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Miller's Dry Goods is an all equity firm with 48,000 shares of stock outstanding at a market price of $50 a share. The company's earnings before interest and taxes are $128,000. Miller's has decided to add leverage to its financial operations by issuing $250,000 of debt at 8 percent interest. The debt will be used to repurchase shares of stock. You own 400 shares of Miller's stock. You also loan out funds at 8 percent interest. How many shares of Miller's stock must you sell to offset the leverage that Miller's is assuming? Assume you loan out all of the funds you receive from the sale of stock. Ignore taxes.    A.  35.6 shares B.  40.0 shares C.  41.67 shares D.  47.5 shares E.  50.1 shares Miller's interest = $250,000 × 0.08 = $20,000 Miller's shares repurchased = $250,000/$50 = 5,000 Miller's shares outstanding with debt = 48,000 - 5,000 = 43,000 Miller's EPS, no debt = $128,000/48,000 = $2.666667 Miller's EPS, with debt = ($128,000 - $20,000)/43,000 = $2.511628 Miller's value of stock = 43,000 × $50 = $2,150,000 Miller's value of debt = $250,000 Miller's total value = $2,150,000 + $250,000 = $2,400,000 Miller's weight stock = $2,150,000/$2,400,000 = 0.895833 Miller's weight debt = $250,000/$2,400,000 = 0.104167 Your initial investment = 400 × $50 = $20,000 Your new stock position = 0.895833 × $20,000 = $17,916.67 Your new number of shares = $17,916.67/$50 = 358.3333 Number of shares sold = 400 - 358.3333 = 41.67 shares Check: Your new loans = 0.104167 × $20,000 = $2,083.33 Your total unlevered income = 400 × $2.666667 = $1,066.67 Your total levered income = (358.3333 × $2.511628) + ($2,083.33 × 0.08) = $11,066.67