A firm issues 100,000 equity shares with a total market value of $5,000,000.The firm's market value of debt is also of equal amount .The firm is expected to generate $1.5 million in operating income and pay $250,000 in interest.Ignoring taxes,this will generate $12.50 earnings per share.What will happen to EPS if the firm's borrowing and interest expense increases by 75% and the number of shares in circulation is cut by 75% (assuming that the share price remains unchanged with this change in capital structure) ?
A) EPS decrease to $10.00.
B) EPS stay at $12.50.
C) EPS increase to $30.00.
D) EPS increase to $42.50.
Correct Answer:
Verified
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