Consider two companies in a world with no taxes 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

Company 1's EPS is $2.00 ($800/400 shares). Company 2's EPS is $1.83 (($800 - $250 interest)/300 shares).

Consider Two Companies in a World with No Taxes That