Question

Firm A has increased its EPS (Earnings per share) by increasing the weighting of debt in its capital structure, compared to competitor Firm B, which finances mainly through increased stock offerings. Firm A's EPS, relative to competitor firm B has improved because:________. A. Its value as a firm is greater B. Its number of shares outstanding is lower C. Its number of shares outstanding are lower, and its earnings after tax is higher D. Its net income is higher

Answer 1

B. Its number of shares outstanding is lower

Step-by-step explanation:

Earnings per share (EPS) = (net income - preferred dividends) / weighted average shares outstanding

there are two ways in which a company's EPS can be higher:

1. increase the numerator: increase net income, which is unlikely due to higher interest expense
2. decrease the denominator: firm A has fewer stocks outstanding. This is more likely to occur.