Part A. A firm is expected to generate $1.5 million in operating income and pay
ID: 2654105 • Letter: P
Question
Part A. A firm is expected to generate $1.5 million in operating income and pay $250,000 in interest. Ignoring taxes, this will generate $12.50 earnings per share. What will happen to EPS if operating income increases to $2.0 million?
A. EPS increase to $15.63.
B. EPS increase to $16.67.
C. EPS increase to $17.50.
D. EPS increase to $20.00.
Part B. A firm's capital structure is represented by its mix of:
A. assets.
B. liabilities and equity.
C. assets and liabilities.
D. assets, liabilities, and equity.
Explanation / Answer
Answer:
A. Calculation of Change in EPS:
Number of shares = (Operating income – interest ) / EPS
=(1500000-250000) /12.50
=100000 Shares
New EPS if Operating income increased to $2,000,000
EPS = (Operating income – Interest ) / Number of shares
=(2000000 -250000) /100000
= $17.50 Per share
Hence EPS shall increase to $17.50 Per share.
B. As per basic accounting equation :
Capital (Equity) = Assets – Liabilities
Hence A firm's capital structure is represented by its mix of assets and liabilities