Harris inc. has ebit of $1,500 and debt of $5,000 on which it pays 12% interest. its eps is currently $2.35 per share. management anticipates a difficult period ahead and fears ebit could decline by as much as 20%. what will the new eps be if that happens?

Ans. The new EPS be if that happens will be $1.57

Explanation:

Hi, first let´s introduce the equation we need to find the EPS.

And since we know that the next EBIT will decline by 20%, our new EBIT will be 80% of the initial EBIT, so we solve the last equation for (1-tax) and we get the following 2 equations.

Our interest expense (Int) is $5,000*0.12= $600, EBIT is 1,500, 0.8*EBIT=1,200, EBIT(1)=$2.35, so we solve for EPS(2) the followiong equation.

Therefore, our new EPS if the company´s EBIT drops by 20% would be $ 1.57.

Best of luck.

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