Question

Franklin Corporation is comparing two different capital structures, an all-equity plan (Plan I) and a levered plan (Plan II). Under Plan I, the company would have 195,000 shares of stock outstanding. Under Plan II, there would be 145,000 shares of stock outstanding and $2.1 million in debt outstanding. The interest rate on the debt is 8 percent and there are no taxes. a. If EBIT is $550,000, what is the EPS for each plan?

Answer 1

The EPS for Plan 1 and Plan 2 is 2.82 and 2.63 respectively

Step-by-step explanation:

The formula to compute Earning Per Share is shown below:

= (EBIT - Interest) ÷ Number of outstanding shares

For Plan I,

EPS = $550,000 ÷ 195,000

= $2.82

For Plan 2, the interest on debt would be

= Outstanding Debt amount × rate of debt

= $2,100,000 × 8%

= $168,000

So, EPS = ($550,000 - $168,000) ÷ 145,000

= $2.63

Hence, the EPS for Plan 1 and Plan 2 is 2.82 and 2.63 respectively