Question

rapper 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 200,000 shares of stock outstanding. Under Plan II, there would be 150,000 shares of stock outstanding and $3 million in debt outstanding. The interest rate on the debt is 8 percent, and there are no taxes. a. If EBIT is $675,000, what is the EPS for each plan

Answer 1

EPS formula = (net income - preferred stock dividends) / weighted average outstanding stocks

Earnings per share (EPS) for Plan I:

EPS = $675,000 / 200,000 = $3.375 or $3.38 per share

Earnings per share (EPS) for Plan II:

net income = EBIT - interests = $675,000 - $240,000 = $435,000

EPS = $435,000 / 150,000 = $2.90 per share