Zybeck Corp. projects operating income of $4 million next year. The firm's income tax rate is 40%. Zybeck presently has 750,000 shares of common stock which have a market value of $10 per share, no preferred stock, and no debt. The firm is considering two alternatives to finance a new product: (a) the issuance of $6 million of 10% bonds, or (b) the issuance of 60,000 new shares of common stock. There are no issuance costs for either the bonds or the stock. If Zybeck issues common stock this year, what will projected EPS be next year?
A) $2.10
B) $2.96
C) $2.33
D) $1.67

Question

Quizplus · Accepted Answer

EPS = (Operating income * (1 - Tax rate)) / Number of shares outstanding= (4,000,000 * (1 - 0.40)) / (750,000 + 60,000)= 2,400,000 / 810,000= $2.96