Answer:
$0.60
Explanation:
Computation of Firm High's EPS
Profit before Tax (PBT) = EBIT - Interest on debt
= 500,000 - (12% * (70% * 3,000,000)) (Firm High's use of debt is 70%)
= 500,000 - (12%*2,100,000)
= 248,000
Earnings = PBT - tax = 248,000 - (35% * 248,000)
= 161,200
Given 90,000 shares, the EPS = 161,200/90,000 = $1.79.
Computation of Firm Low's EPS
Profit before Tax (PBT) = EBIT - Interest on debt
= 500,000 - (10% * (20% * 3,000,000)) (Firm Low's use of debt is 20%)
= 500,000 - (10%*600,000)
= 440,000
Earnings = PBT - tax = 440,000 - (35% * 440,000)
= 286,000
Given 240,000 shares, the EPS = 286,000/240,000 = $1.19.
Therefore, EPSHigh - EPSLow = 1.79 - 1.19 = $0.60.
