Question

Firm A has $1 million in operating income and pays $250,000 in interest. In addition, firm A has $7.50 EPS. Firm B has an operating income of $2.0 million. Assume that both firms have the same amount of debt and the same number of shares (ignore taxes). We can conclude that firm's B has higher EPS than firm A by the amount of: $10.00 $12.50 $15.00 $20.00

Answer 1

Answer:

$10.00

Explanation:

Earning per share is the ratio of net Income of the business per outstanding share of the business after deducting the preferred dividend from net earning. It shows how much each stockholder earn against their each share in a specific period.

Earning Per share ( EPS ) of Firm A  = $7.50 per share

Number of outstanding share can be calculated as follow

EPS  = Net Income / Outstanding Numbers of share

Outstanding Numbers of shares = Net Income / EPS

Outstanding Numbers of shares = ($1,000,000 - $250,000) / $7.5 per share = 100,000 shares

Firm B

As Tax will be ignored, interest expense is also same as the Firm A and numbers of share is also sames.

Operating Income = $2.0 million = $2,000,000

Less: Interest expense                    $250,000

Net Income                                      $175,000

EPS = $175,000 / 100,000 share = $17.5 per share

Difference  = $17.5 - $7.5 = $10 per share