Question

Northwestern Lumber Products currently has 18,500 shares of stock outstanding. Patricia, the financial manager, is considering issuing $141,000 of debt at an interest rate of 6.8 percent. Given this, how many shares of stock will be outstanding once the debt is issued if the break-even level of EBIT between these two capital structure options is $67,000?

Answer 1

Answer:

The number of outstanding shares of stock is 2647.44

Explanation:

In this question, we are asked to calculate the number of shares of stocks that will be outstanding once the debt is issued.

We proceed as follows;

Firstly we must know that the Break even EBIT is the EBIT where EPS plan I = EPS plan II

Mathematically;

EBIT*(1-tax rate)/shares = (EBIT-interest rate*debt)*(1-tax rate)/Shares after repurchase

Inputing the values, we have ;

67000*(1-0)/18500=(67000-0.068*141000)*(1-0)/Shares after repurchase

Shares after repurchase = 15852.56

Mathematically;

Shares outstanding = old shares - Shares after repurchase = 18500-15852.56=2647.44