Round Hammer 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 155,000 shares of stock outstanding. Under Plan II, there would be 105,000 shares of stock outstanding and $1.3 million in debt outstanding. The interest rate on the debt is 6 percent, and there are no taxes. a. If EBIT is $200,000, what is the EPS for each plan

Question

Briley Bernard

Business

28 June, 08:11

Round Hammer 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 155,000 shares of stock outstanding. Under Plan II, there would be 105,000 shares of stock outstanding and $1.3 million in debt outstanding. The interest rate on the debt is 6 percent, and there are no taxes. a. If EBIT is $200,000, what is the EPS for each plan

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Sophia · Answer 1

Plan A $1.29

Plan B $1.16

Explanation:

The computation of Earning per share is given below:-

Plan 1 Plan 2

Earning before interest and tax $200,000 $200,000

Less: Interest 1,300,000 * 6% $78,000

Earning to stock holders A $200,000 $122,000

Number of stocks B 155,000 105,000

Earning per share A : B $1.29 $1.16