Ben Ten Limited (BTL) is a new company and management are trying to decide on a financing structure. They want to raise $10,000,000. They were offered the following option:

Fund 60% of the firm with debt and the balance with ordinary shares at an issue price of $2 per share. BTL has been advised that the cost of debt finance would be 4.84%pa due to its relative risk.

The current Earnings Before Interest and Tax (EBIT) is $2,000,000

The company tax rate is 30%.

Calculate the Earnings Per Share of this option (Round your answer to 2 decimal places. For example, if your answer is 0.66666666 - Enter your answer as 0.67)

Question

Ben Ten Limited (BTL) is a new company and management are trying to decide on a financing structure.  They want to raise $10,000,000. They were offered the following option:

Fund 60% of the firm with debt and the balance with ordinary shares at an issue price of $2 per share. BTL has been advised that the cost of debt finance would be 4.84%pa due to its relative risk.

The current Earnings Before Interest and Tax (EBIT) is $2,000,000

The company tax rate is 30%.

Calculate the Earnings Per Share of this option (Round your answer to 2 decimal places. For example, if your answer is 0.66666666 -> Enter your answer as 0.67)

BlackTom AI · Accepted Answer

The task describes Ben Ten Limited (BTL) considering a financing structure to raise $10,000,000, funded 60% by debt and 40% by ordinary shares at $2 per share. Debt cost is 4.84% per annum, EBIT is $2,000,000, and the tax rate is 30%.

First, determine the amounts raised by debt and equity:
- Debt financing = 60% of $10,000,000 = $6,000,000
- Equity financing = 40% of $10,000,000 = $4,000,000
- At $2 per share, the number of new ordinary shares issued = $4,000,000 / $2 = 2,000,000 shares

Next, compute the annual interest expense on the debt:
- Interest expense = 6,000,000 × 4.84% = 6,000,000 × 0.0484 = 290,400

Assess profitability after debt service and taxes to find net income:
- Earnings before tax (EBT) = EBIT − Interest = 2,000,000 − 290,400 = 1,709,600
- Taxes = 30% of EBT = 0.30 × 1,709,600 = 512,880
- Net income (NI) = EBT − Taxes = 1,709,600 − 512,880 = 1,196,720

Now calculate earnings per share (EPS) using the number of ordinary shares issued:
- Shares outstanding = 2,000,000
- EPS = NI / Shares = 1,196,720 / 2,000,000 = 0.59836...
- Rounded to two decimals, EPS = 0.60

In summary, with the given numbers, the calculated EPS is approximately 0.60. If the provided answer is 0.67, this would imply a different set of inputs or a different interpretation of components (for example, a different debt amount, share count, tax treatment, or cost of debt). Based on the data provided in the question, the result 0.60 is the mathematically correct EPS, rounded to two decimals, rather than 0.67.

Key checks:
- Debt amount aligns with 60% of total financing: 6,000,000
- Equity share issuance aligns with 40% of total financing at $2 per share: 2,000,000 shares
- Interest expense correctly computed from debt and rate: 290,400
- Tax effect applied to EBIT minus interest (the standard debt tax shield): 512,880
- Net income divided by the correct number of shares yields EPS ~0.60

If you want to explore how to obtain 0.67 as the EPS, we would need to adjust one of the inputs (for instance, changing the amount of debt, the share count, the tax rate, or the cost of debt) and then recompute to see which combination yields 0.67.

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