A firm has a current capital structure consisting of $400,000 of 12 percent annual interest debt and50,000 shares of common stock. The firm's tax rate is 40 percent on ordinary income. If the EBIT isexpected to be $200,000, the firm's earnings per share will be_________.
A) $1.82
B) $3.04
C) $7.04
D) $2.40

Question

Quizplus · Accepted Answer

The correct answer is A.The firm's earnings before interest and taxes (EBIT) is $200,000. The firm's interest expense is $400,000 * 12% = $48,000. The firm's earnings before taxes (EBT) is $200,000 - $48,000 = $152,000. The firm's taxes are $152,000 * 40% = $60,800. The firm's net income is $152,000 - $60,800 = $91,200. The firm's earnings per share is $91,200 / 50,000 = $1.82.

A Firm Has a Current Capital Structure Consisting of $400,000