Martha White's Fabrics Is Currently an All Equity Firm That

Multiple Choice

Martha White's Fabrics is currently an all equity firm that has 15,000 shares of stock outstanding at a market price of $12.50 a share. Company management has decided to issue $50,000 worth of debt and use the funds to repurchase shares of the outstanding stock. The interest rate on the debt will be 9%. What are the earnings per share at the break-even level of earnings before interest and taxes? Ignore taxes.

A) $1.005
B) $1.125
C) $1.175
D) $1.200
E) $1.250