Two companies, Jefferson and Jackson, are virtually identical in all aspects of their operations except that the two companies differ in their capital structures, as shown below. Jefferson
$$\begin{array} { l r r }
& \text { Jefferson } & \text { Jackson } \
\text { Debt } ( 10 \% ) & \$ 200 \text { million } & \$ 100 \text { million } \
\text { Common equity } & \$ 300 \text { million } & \$ 400 \text { million } \
\text { No. shares outstanding } & 15 \text { million } & 20 \text { million }
\end{array}$$
?
Both companies have $500 million in total assets and both have a 40% marginal tax rate. What is the EPS for Jefferson at an EBIT level of $50 million?
A) -$1.20
B) $1.20
C) $2.20
D) $3.33

Question

Two companies, Jefferson and Jackson, are virtually identical in all aspects of their operations except that the two companies differ in their capital structures, as shown below. Jefferson
$$\begin{array} { l r r } 
& \text { Jefferson } & \text { Jackson } \
\text { Debt } ( 10 \% ) & \$ 200 \text { million } & \$ 100 \text { million } \
\text { Common equity } & \$ 300 \text { million } & \$ 400 \text { million } \
\text { No. shares outstanding } & 15 \text { million } & 20 \text { million }
\end{array}$$
?
Both companies have $500 million in total assets and both have a 40% marginal tax rate. What is the EPS for Jefferson at an EBIT level of $50 million?
A) -$1.20
B) $1.20
C) $2.20
D) $3.33

Quizplus · Accepted Answer

To calculate the EPS (Earnings Per Share) for Jefferson, we first need to determine the net income. The formula for net income starting from EBIT (Earnings Before Interest and Taxes) is:$$ \text{Net Income} = (\text{EBIT} - \text{Interest}) \times (1 - \text{Tax Rate}) $$For Jefferson:- EBIT = $50 million- Interest = 10% of $200 million = $20 million- Tax Rate = 40%$$ \text{Net Income} = (\$50m - \$20m) \times (1 - 0.4) = \$30m \times 0.6 = \$18m $$To find the EPS:$$ \text{EPS} = \frac{\text{Net Income}}{\text{No. shares outstanding}} = \frac{\$18m}{15m} = \$1.20 $$

Two Companies, Jefferson and Jackson, Are Virtually Identical in All