Consider two firms that are identical in every way except that one has

Consider two firms that are identical in every way except that one has $15,000 of debt and 500 shares of stock outstanding, while the other is all-equity and has 650 shares of stock outstanding.

Assume that the debt is a perpetuity with annual coupons at the rate of 6%. What is each firms’ earnings per share if EBIT is $7,500? Assume a tax rate of 40%.

Leveraged Firm All-Equity Firm
EBIT $7,500 $7,500
EPS ? ?

A) EPSL = 7.92; EPSE = 7.92
B) EPSL = 6.92; EPSE = 7.92
C) EPSL = 6.92; EPSE = 6.92
D) EPSL = 7.92; EPSE = 6.92
E) EPSL = 8.92; EPSE = 6.92

ANSWER

D