Dell Ltd has no debt outstanding, and currently has a market value of $125 million. There are three possible scenarios for the next year:
|Economic condition||Earnings before interest and tax (EBIT)|
The company is considering issuing $50m of debt with 5% interest rate. Dell will use the money raised through the debt issuance to repurchase the ordinary shares. There are currently 10 million shares outstanding.
- Assume no tax, what are the possible outcomes for earnings per share (EPS) next year before the debt is issued?
- Assume Dell has issued the debt and repurchased the shares, calculate (a) again. What do you observe?
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