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:
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: 
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

Solution:
EBT = $50 - $20 = $30
EAT = $30(1 - 0.4) = $18
EPS = $18,000,000/15,000,000 = $1.20

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