Question

Franklin Corporation is comparing two different capital structures, an all-equity plan (Plan I) and a levered plan (Plan II). Under Plan I, the company would have 170,000 shares of stock outstanding. Under Plan II, there would be 120,000 shares of stock outstanding and $2.21 million in debt outstanding. The interest rate on the debt is 7 percent and there are no taxes.

If EBIT is $450,000, what is the EPS for each plan?

Answer 1

Answer:

The answer is given below;

Explanation:

Plan  II    EPS=Net Income/Weighted Average shares outstanding

                    =$450,000-(2,210,000*7%)/120,000=$2.46

Plan I    =$450,000/170,000=$2.64

Answer 2

Earning per share for plan A and plan B is $2.65 and $2.46

Computation table:

                                Plan A(Equity)   Plan B(Levered plan)

EBIT                          $450,000           $450,000

Less: Interest                                        $154,700

Net income               $450,000           $295,300

No. of out share          170,000              120,000

Earning per share           $2.65                $2.46

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