Jensen Farms, Inc., plans to borrow $12 million, which it will use to repurchase shares. The following information is given:
- Share price at time of share repurchase=$60
- Earnings after tax=$6.6 million
- EPS before share repurchase=$3
- Price/Earnings ratio (P/E)=$60/$3=20
- Earnings yield (E/P)=$3/$60=5%
- Shares outstanding=2.2 million
- Planned share repurchase=200,000 shares
1. Calculate the EPS after the share repurchase, assuming the after tax cost of borrowing is the company’s customary after tax borrowing rate of 5 percent.
2. Calculate the EPS after the share repurchase, assuming the company’s borrowing rate increases to 6 percent because of the increased financial risk of borrowing the $12 million.