Two Companies, Jefferson and Jackson, Are Virtually Identical in All

question 5

Multiple Choice

Two companies, Jefferson and Jackson, are virtually identical in all aspects of their operations except that the two companies differ in their capital structures, as shown below. Jefferson
$$\begin{array} { l r r } & \text { Jefferson } & \text { Jackson } \\\text { Debt } ( 10 \% ) & \$ 200 \text { million } & \$ 100 \text { million } \\\text { Common equity } & \$ 300 \text { million } & \$ 400 \text { million } \\\text { No. shares outstanding } & 15 \text { million } & 20 \text { million }\end{array}$$
?
Both companies have $500 million in total assets and both have a 40% marginal tax rate. What is the EPS for Jefferson at an EBIT level of $50 million?

• A) -$1.20
• B) $1.20
• C) $2.20
• D) $3.33

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Definitions:

Reverse Stock Split

A corporate action that consolidates the number of existing shares of stock into fewer, proportionally more valuable, shares.

Shares Outstanding

The sum of all shares of a company currently held by its investors, encompassing both large block holdings by institutional investors and shares that are under restrictions.

Liquidating Dividend

A type of dividend paid by a corporation out of its capital base, as opposed to its earnings, often signaling the company is dissolving.

Dividend Policy

A company's approach to distributing profits back to its shareholders, dictating how much to pay out as dividends and how often.