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 $800
Company 1 has 400 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 $1.83.
C) Company 1 has an EPS of $2.00 and Company 2 has an EPS of $1.83.
D) Company 1 has an EPS of $2.00 and Company 2 has an EPS of $1.50.
Answer: C
Explanation: C)
Company 1: Net Income = EBIT - interest = $800 - 0 = $800.
EPS = = = $2.00.
Company 2: Net Income = EBIT - interest = $800 - $250 = $550.
EPS = = = $1.83.
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