Ricalta Inc. earns a total of $500,000 before interest and taxes. Its total debt is $1,110,000 (costing 5%). It has 150,000 shares of common stock at…

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Ricalta Inc. earns a total of $500,000 before interest and taxes. Its total debt is $1,110,000 (costing 5%). It has 150,000 shares of common stock at $5 per share. The firm is considering reducing its debt by $450,000 by issuing an additional 90,000 shares of common stock. The firm is in the 35 percent tax bracket. Its earnings before interest and taxes will remain the same as the new capital structure will not impact the firm’s operations. Which of the following will be a consequence of the change in Ricalta’s capital structure?​

  • ​The firm’s net income will increase by $10,625.
  • ​The firm’s earnings before taxes (EBT) will remain unchanged.
  • ​The firm’s earnings per share (EPS) will be reduced by $0.66.
  • ​The firm’s net income will decrease by $14,625.

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