A firm has a current capital structure consisting of $400,000 of 6 percent annual interest debt and 50,000 shares of common stock.The firm's tax rate is 21 percent on ordinary income.If the EBIT is expected to be $200,000,the firm's earnings per share will be ________.
A)$3.12
B)$0.74
C)$3.52
D)$2.78

Question

Quizplus · Accepted Answer

To calculate EPS, first find the interest expense: $400,000 * 6% = $24,000. Then, calculate taxable income: $200,000 (EBIT) - $24,000 (interest) = $176,000. Calculate taxes: $176,000 * 21% = $36,960. Net income is $176,000 - $36,960 = $139,040. EPS is $139,040 / 50,000 shares = $2.78.

A Firm Has a Current Capital Structure Consisting of $400,000