Consider two companies in a world with no taxes that are alike except in borrowing choices.District Corp.has no debt financing,and Energy Corp.uses debt financing.The EBIT for both companies is $2,500,000.District Corp.has 500,000 shares outstanding and pays no interest.Energy Corp.has 350,000 shares outstanding and pays $1,000,000 in interest.What is the EPS for each company?
A)Both companies have an EPS of $5.71.
B)Both companies have an EPS of $5.00.
C)District Corp.has an EPS of $5.71 and Energy Corp.has an EPS of $5.00.
D)District Corp.has an EPS of $5.00 and Energy Corp.has an EPS of $4.29.

Question

Quizplus · Accepted Answer

District Corp.'s EPS = $2,500,000 / 500,000 = $5.00. Energy Corp.'s EPS = ($2,500,000 - $1,000,000) / 350,000 = $4.29.

Consider Two Companies in a World with No Taxes That