Question

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

Answer 1

Answer:

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