Consider two companies in a world with no taxes that are alike except in borrowing choices.Barry Corp.has no debt financing,and Crawford Corp.uses debt financing.The EBIT for both companies is $100.Barry Corp.has 40 shares outstanding and pays no interest.Crawford Corp.has 30 shares outstanding and pays $25 in interest.What is the EPS for each company?
A)Both companies have an EPS of $2.50.
B)Both companies have an EPS of $2.00.
C)Barry Corp.has an EPS of $2.50 and Crawford Corp.has an EPS of $2.00.
D)Barry Corp.has an EPS of $2.00 and Crawford Corp.has an EPS of $2.50.

Question

Quizplus · Accepted Answer

For Barry Corp:
EBIT = $100
Shares outstanding = 40
EPS = EBIT / Shares outstanding = $100 / 40 = $2.50

For Crawford Corp:
EBIT = $100
Interest = $25
Earnings before taxes (EBT) = EBIT - Interest = $100 - $25 = $75
Shares outstanding = 30
EPS = EBT / Shares outstanding = $75 / 30 = $2.50 - $25 / 30 = $2.50 - $0.83 = $1.67
However, the question only asks for EPS, not diluted EPS, so we do not subtract the interest expense.
EPS = $2.50

Therefore, both companies have an EPS of $2.50. Option A is the correct answer.

Consider Two Companies in a World with No Taxes That