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 Jackson at an EBIT level of $50 million?
A) $1.50
B) $1.20
C) $2.00
D) $2.50

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 Jackson at an EBIT level of $50 million?
A) $1.50 
B) $1.20 
C) $2.00 
D) $2.50

Quizplus · Accepted Answer

Solution:
EBT = $50 - $10 = $40
EAT = $40(1 - 0.4) = $24
EPS = $24,000,000/20,000,000 = $1.20

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