Question

Consider two companies in a world with no taxes that are alike except in borrowing choices. Company 1 has no debt​ financing, and Company 2 uses debt financing. The EBIT for both companies is​ $1,000. Company 1 has 500 shares outstanding and pays no interest. Company 2 has 300 shares outstanding and pays​ $250 in interest. What is the EPS for each​ company? A. Both companies have an EPS of​ $2.00. B. Both companies have an EPS of​ $2.67. C. Company 1 has an EPS of​ $2.00 and Company 2 has an EPS of​ $2.50. D. Company 1 has an EPS of​ $2.00 and Company 2 has an EPS of​ $2.27.

Answer 1

Answer:

C) Company 1 has an EPS of​ $2.00 and Company 2 has an EPS of​ $2.50.

Explanation:

The formula used to calculate earnings per share:

earnings per share (EPS) = (net income - preferred stocks' dividends) / outstanding shares

Company 1:

EPS = $1,000 / 500 shares = $2 per share

Company 2:

net income = $1,000 - $250 = $750

EPS = $750 / 300 shares = $2.50