Consider two companies that are alike except in borrowing choices. Company 1 has no debt financing, and Company 2 uses debt financing. The EBIT for both companies is $800. Company 1 has 400 shares outstanding and pays no interest. Company 2 has 300 shares outstanding and pays $250 in interest. What is the EPS for each company?
A) Both companies have an EPS of $2.00.
B) Both companies have an EPS of $1.83.
C) Company 1 has an EPS of $2.00 and Company 2 has an EPS of $1.83.
D) Company 1 has an EPS of $2.00 and Company 2 has an EPS of $1.50.

Question

Quizplus · Accepted Answer

EPS for Company 1 = EBIT / Number of shares = $800 / 400 = $2.00EPS for Company 2 = (EBIT - Interest) / Number of shares = ($800 - $250) / 300 = $1.83

Consider Two Companies That Are Alike Except in Borrowing Choices