Consider two companies that are alike except in borrowing choices. Company A has
ID: 2698245 • Letter: C
Question
Consider two companies that are alike except in borrowing choices. Company A has no debt financing and Company B uses debt financing. The EBIT for both companies is $100. Company A has 40 shares outstanding and pays no interest. Company B has 30 shares outstanding and pays $25 in interest. What is the EPS for each company?
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Explanation / Answer
EPS forcompany A = 100/40 = 2.5
EPS forcompany B = 125/30 = 4.167