Explanation

Step 1: Calculate current EPS Current EPS = Earnings / Shares outstanding = $45,000,000 / 4,500,000 = $10.00

Step 2: Calculate interest expense on new debt Interest expense = $25,000,000 × 7% = $1,750,000

Step 3: Calculate new earnings after interest expense New earnings = $45,000,000 - $1,750,000 = $43,250,000

Step 4: Calculate new shares outstanding after repurchase New shares = 4,500,000 - 250,000 = 4,250,000

Step 5: Calculate new EPS New EPS = $43,250,000 / 4,250,000 = $10.176 ≈ $10.2

Verification:

• Earnings yield = $10 / $100 = 10%
• After-tax cost of debt = 7%
• Since 10% > 7%, EPS should increase (from $10.00 to $10.18)

Therefore, the EPS after the share repurchase will be closest to $10.2.