Consider two companies in a world with no taxes that are alike except in borrowing choices.Pacific Corp.has no debt financing,and Atlantic Corp.uses debt financing.The EBIT for both companies is $900.Pacific Corp.has 300 shares outstanding and pays no interest.Atlantic Corp.has 200 shares outstanding and pays $200 in interest.What is the EPS for each company?
A)Both companies have an EPS of $3.50.
B)Both companies have an EPS of $3.00.
C)Pacific Corp.has an EPS of $3.50 and Atlantic Corp.has an EPS of $3.00.
D)Pacific Corp.has an EPS of $3.00 and Atlantic Corp.has an EPS of $3.50.

Question

Quizplus · Accepted Answer

Pacific Corp.'s EPS is calculated as EBIT divided by the number of shares, which is $900 / 300 = $3.00. Atlantic Corp.'s EPS is calculated as (EBIT - Interest) divided by the number of shares, which is ($900 - $200) / 200 = $3.50.

Consider Two Companies in a World with No Taxes That