What Happens to an All-Equity Firm's EPS When $1 Million

question 59

Multiple Choice

What happens to an all-equity firm's EPS when $1 million of 20% debt is issued and proceeds used to repurchase two-thirds of the stock if operating income equals $1.5 million and EPS were $2 when the firm was all equity financed? Ignore taxes.(Use values in dollar.)

• A)EPS increase to $2.60
• B)EPS increase to $3.00
• C)EPS increase to $4.80
• D)EPS increase to $5.20

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Definitions:

Producing Units

Producing units are individual entities, such as factories or plants, within an organization that are responsible for producing goods or services.

Marginal Cost

The extra expense associated with manufacturing an additional unit of a product or service.

Marginal Revenue (MR)

The incremental earnings obtained from the sale of an additional good or service unit.

Marginal Cost (MC)

The increase or decrease in the total cost that arises when the quantity produced changes by one unit.