Answer and Explanation:
The computation is shown below
As we know that
1. EPS = ( Net income - dividends ) ÷ Average number of share
A.
For Plan 1
Number of share = 715,000
EPS = 1600000 ÷ 715000
= 2.23
For Plan 2
Net income = EBIT = $1.6 million = $1,600,000
Interest = 0.07*6,750,000 = 472,500
EBT = 1,127,500
Tax = 0
Net Income = 1,127,500
Numberof share = 465,000
So,
EPS = $1,127,500 ÷ 465000
= 2.42
B.
For Plan 1
EPS = 3100000 ÷ 715000
= 4.33
For Plan 2
When EBIT = 3,100,000
Interest = 0.07 × 6,750,000 = $472,500
Net Income = 2,627,500
So,
EPS = $2,627,500 ÷ 465000
= 5.65
C.
Plan 1 EBIT = Plan 2 EBIT
EBIT ÷ 715000 = (EBIT - 0.07 × $6,750,000) ÷ 465000
EBIT = 1,351,350 or $1.35 million
